Tuesday, October 12, 2010

QUESTION: How do UK grocery stores soften competition?

ANSWER:  by locating in areas unlikely to face entry by a competitor:

A colleague just pointed me to a UK Competition Commission study of the UK grocery industry (summary, report).

Here is my summary (in bold) of their findings:

1.  Competition is localized:
...We conclude that one-stop shopping patterns are primarily local, with consumers rarely travelling more than 10 minutes in urban areas, and rarely more than 15 minutes elsewhere to do their main weekly shopping. We consider that on the basis of various economic criteria, five of the main parties are able to exercise power in this market, namely Asda, Morrison, Safeway, Sainsbury and Tesco. 

2.  New store locations are getting harder to find due to local zoning regulations that prevent entry outside the city center.
...significant barriers existed, such that potential competition from new entrants might not be an effective constraint on the pricing behaviour

3. The remedy is to require Competition agency approval for new store openings:
...if Asda, Morrison, Safeway, Sainsbury or Tesco wish to acquire an existing store, or build a new store, having over 1,000 sq metres (about 11,000 sq feet) of grocery retail sales area within a 15-minute drive time of one of its existing stores, or significantly to extend the grocery retailing area of an existing store, it should be required to apply to the DGFT for consent. 

I understand everything but the remedy. The regulators can prevent new entry, but they cannot force rivals to enter. The closest thing to this kind of regulation in the US is the Certificate of Need regulations preventing hospital entry in the US, which have been use to raise barriers to entry. When the FTC reviewed these laws it concluded that
States should consider the following steps to decrease barriers to entry into provider markets: Reconsider whether Certificate of Need Programs best serve their citizens’ health-care needs. On balance, the FTC and DOJ believe that such programs are not successful in containing health care costs, and they pose serious anticompetitive risks that usually outweigh their purported economic benefits.

1 comment:

  1. Can you say regulatory capture...
    The remedy is exactly what the stores want, heh.