Issues in UK food retail pricing

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Abstract

In this PhD we analyse some topics about food-retail pricing behaviour from the
point of view of the empirical industrial organisation. Large UK supermarkets chains
are actively involved in quality discrimination; they offer three quality variants for
most of the products they sell. These quality variants are from higher to lower quality:
branded products, high quality own brand products and low quality own brands.
Hence, the first two empirical chapters of this PhD are aimed at studying the implications
of the supermarkets chains multiquality nature over supermarkets patterns of
price competition. The first of these chapters compares the pattern of price dispersion
and price competition for each quality variant. In the second of them we build an
econometric model that allows to take into account the effects of competition over the
price setting for each quality variant of: different quality variants sold at the same
supermarkets, and variants of the same and different quality sold at different supermarkets.
The results of these two chapters suggest that competition is less intense for
the quality variant with greater possibilities of supermarket product differentiation,
the high quality own brand products. The joint consideration of this softer price competition
and the higher market share of this quality variant in UK food retailing (if
compared with continental food retailing) offers a new explanation for the high profits
enjoyed by the UK supermarkets in comparison with their continental counterparts.
Claims for antitrust actions against low-price guarantees have been quite common in
the USA for some time now. In the UK, the report "Competition in Retailing" written
by London Economics for the Office of Fair Trade recognises the anticompetitive effects
of low-price guarantees. However, the analysis of Tesco 's Unbeatable Value low-price
guarantee did not detect any anticompetitive effect. Tesco 's Unbeatable value triggered
a process of reduction of the prices of the products included in the guarantee. Further
analysis of the data and the consideration of the supermarket as a multiproduct firm
lead us to analyse the possible relationship between this low-price guarantee and a lossleaders
strategy. Our analysis seriously advises to reconsider the effects of low-price
guarantees when the firms offering them are multiproduct firms.
• Large UK supermarket chains face not only the competiticin of other supermarkets
but also the competition of discounters. Whereas large UK supermarkets chains offer
a homogeneous level of service quality, the level of service quality offered by the
discounters is manifestly lower. We propose a model controlling both for locational
asymmetries and service quality differentials to analyse the ability of service quality as
a market segmentation tool. Also with the aim of analysing this segmentation ability,
we study the differential effects of Tesco 's Low Price Guarantee over a supermarket
and a discounter store affected by it. The results of these two analysis confirm the ability
of service quality differentials to segment the market and advice the consideration
of supermarkets and discounters as forming part of two different relevant markets.
All the empirical analysis is carried out using a panel of prices that were collected
in three supermarkets and a discounter in the south area of Coventry.

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