Dynamic Explanation of Industry Structure and Performance
Cotterill
billion and a national market share of 19.3 percent.
These two mammoth chains would account for slightly
over 40 percent of supermarket sales. Walmart’s much
ballyhooed expansion by building supercenters is trivial
in comparison. A third combination could assemble
another 20 percent firm in response to these conjectured
consolidations. These three firms plus a larger Walmart,
e.g. 10 percent SOM, based on only its food sales, would
put national four-firm concentration at 70 percent.
Today (Spring 2000) the top 4 chains (Kroger; Walmart;
Albertsons and Safeway) control 43% of supermarket
sales. Add Royal Ahold and Del Haize and the top 6
control 52.6%.16
Before discussing the impacts of this new higher
level of national concentration, one might ask would the
state and federal antitrust agencies allow such mergers?
Under the current guidelines and case law they probably
would because they are classified as market extension
mergers that have no impact on retail concentration in
local markets. In other words they do not seem to effect
consumer prices. This may very well be a faulty
conclusion. There is a need for monopsony/oligopsony
merger guidelines to refocus the analysis on the supply
side of these mergers and their impacts upon farmers as
well as consumers. For example, 6 firms that control
over 50% of the nation's supermarkets sales, are
absolutely critical to the performance of a food product
that seeks nationwide distribution. Buyer concentration
may affect performance at levels well below the seller
concentration cutoffs in the horizontal merger
guidelines. Barriers to entry in this national buyers
market are clearly higher than they are in any local food
market. Finally the pricing dynamics of the procurement
market can spill over to affect competition in retail
markets.
The recent rise in "slotting fees" is an example of
how buying power affects retail prices. Many analysts
regard slotting fees as rent for scarce shelf space. This
approach, however essentially assumes no retail buying
power. Clearly this is not the case. Firms with a large
share of the national market or regional firms can extract
slotting fees because manufacturers have no other
channel to a major share of consumers. If markets were
competitive slotting fees would be minimal and at best
cover only the cost of adding and possibly withdrawing
a new product.
16 These spring 2000 shares are from Franklin (2000).
Recently Royal Ahold moved into the food service area by
acquiring the second largest firm, U.S. Foodservice, with $7.0
billion in sales (U.S. Foodservice). Combined with its retail
sales of $20.3 billion in 1999, this clearly increases Royal
Aholds buying power.
Recently, the American Antitrust Institute (AAI) and
Wakefern Food Corporation, Elizabeth, New Jersey, the
nation’s largest retailer-owned cooperative wholesale,
petitioned the FTC on, these issue. The AAI is
concerned that recent mergers have, in fact, generated
sufficient size disparity in the supermarket industry to
trigger Robinson Patman claims:
What we are calling the mega-chains-the five largest
retail grocery sellers-exercise enormous buying power,
which they employ against the food producers and
manufacturers. The sheer size of the mega-chains looms
as a lever-the manufacturers must get their products onto
the shelves of the largest retailers, even if they have to
pay higher, even exorbitant, slotting and other allowances
and make other costly concessions-which they are forced
to do. As a result, manufacturers may raise their prices to
all customers in order to earn an acceptable return on
investment. In that case, all other customers subsidize the
mega-chains. ...smaller customers are always at a
competitive disadvantage, because they are not receiving
the higher allowances and other concessions, which
effectively raises their cost of goods. (Foer, 1999, p.7)
The R-P Act may come to the forefront after decades
of relatively inactive and marginal enforcement.17 It
gives retailers (read smaller ones) legal recourse against
manufacturers that grant discounts to other retailers (read
larger ones) that are not cost justified. Under a
rejuvenated Robinson-Patman Act, manufacturers would
have three options: either give all retailers non-cost
justified discounts that large retailers demand, use the
“targeted marketing” programs of third party firms to
offer benefits to favored retailers, or give no discounts.
Examples of the second option include Catalina’s
check-out coupon program and Actmedia’s in store at
shelf coupon dispensing machines and Priceline.com's
web house grocery program. These programs are chain
specific, i.e. they are not market wide such as a free
standing insert of coupons in a local newspaper. Thus, a
manufacturer is offering a price discount only to
consumers who shop at a particular chain. This
increases that chain’s movement and profitability but not
its competitors. Any rejuvenation of the Robinson-
17 The AAI argument dovetails with the successive monopoly
model. Slotting fees are not moves to eliminate double
marginalization. To sustain monopoly at the retail level
leading supermarket chains prefer a system that limits the
competitive fringe. To the extent that manufacturers raise
fringe supermarkets cost of goods sold relative to leading
supermarkets the power of the latter is enhanced (Salop and
Scheffman, 1987). The practice also acts as a barrier to small
food manufacturers seeking to expand. See Wier, 2000 for a
report on recent Senate hearings on slotting.
Food Marketing Policy Center Research Report No. 53
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