CPB Document

No 163 April, 2008

Static efficiency in Dutch chain

Harold Creusen, Arno Meijer, Gijsbert Zwart, Henry van der Wiel

CPB Bureau for Economic Policy Analysis Van Stolkweg 14 P.O. Box 80510 2508 GM The Hague, the Netherlands

Telephone +31 70 338 33 80 Telefax +31 70 338 33 50 Internet www.cpb.nl

ISBN 978-90-5833-362-9 2 Abstract in English

In this study, we analyse changes in market power in the Dutch supermarket chain and discuss the effects on welfare. The supermarket chain includes consumers, , buyer groups and food manufactures. We look at the theoretical background of market power. Special attention has been paid to recent theories of buyer power of retailers in the vertical chain. Theory suggests that supermarkets can enhance their buyer power by, for instance, using own private brands as an outside option in bargaining with manufacturers. Using firm-level data, indicators reveal that profit margins of both supermarkets and of manufacturers have declined between 1993 and 2005. Hence, competition on these markets seems to have become tougher and mark-ups lower over time. Furthermore, we find no significant empirical indications that supermarkets were able to use their buyer power to shift profits from manufacturers to supermarkets after 1993. Finally, all else equal, in terms of welfare consumers have benefited from fiercer competition in terms of lower prices.

Key words: Supermarket, price cost margins, buyer power, seller power, welfare

JEL code: D40, D61, L11

Abstract in Dutch

Deze studie onderzoekt veranderingen in marktmacht in de supermarktketen en bespreekt de mogelijke effecten ervan op de welvaart in Nederland. De supermarktketen bestaat hier uit consumenten, supermarkten, inkooporganisaties en fabrikanten van levensmiddelen. De studie gebruikt een theoretisch raamwerk met de nadruk op recente inzichten over inkoopmacht van supermarkten aan de inkoopzijde. Supermarkten kunnen hun inkoopmacht versterken door bijvoorbeeld huismerken naast A-merken op te nemen in hun assortiment. Met bedrijfsgegevens over de periode 1993-2005 laten we zien dat zowel tussen supermarkten als tussen fabrikanten de concurrentie heftiger is geworden en dat de gemiddelde marges op beide markten in de supermarktketen zijn gedaald. Daarnaast vinden we geen overtuigend bewijs dat door meer inkoopmacht van supermarkten hun winsten na 1993 toenamen ten koste van de fabrikanten. Tot slot, consumenten hebben geprofiteerd van lagere prijzen en dat kwam ceteris paribus ten goede aan de welvaart.

Steekwoorden: Supermarkten, prijskostenmarges, inkoopmacht, verkoopmacht, welvaart

Een uitgebreide Nederlandse samenvatting is beschikbaar via www.cpb.nl.

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4 Contents

1 Introduction 13 1.1 Background 13 1.2 Research question 13 1.3 Structure of the document 15

2 Structure of the supermarket chain 17 2.1 Introduction 17 2.2 Structure of the market 17 2.3 Main trends 26 2.4 Scope of study 30

3 Theory 31 3.1 Introduction 31 3.2 Market failures and welfare 31 3.3 Why do supermarkets exist? 33 3.4 Horizontal competition in the supermarket chain 34 3.5 Wholesale market: importance of buyer power 36

4 Measuring static efficiency 49 4.1 Introduction 49 4.2 Measuring seller power 49 4.3 Measuring buyer power 54 4.4 Price effects on static efficiency 58

5 Assessment of static efficiency 1993-2005 61 5.1 Introduction 61 5.2 Data issues 61 5.3 Seller power 1993-2005 62 5.4 Decomposition of price-cost margin 66 5.5 Buyer power 1993-2005 71 5.6 Impact of trends on static efficiency 75

6 Beyond aggregate data 79 6.1 Introduction 79 6.2 Price war between supermarkets 79 6.3 Differentiating between product groups 80

5 7 Concluding remarks 87 7.1 Conclusions 87 7.2 Final notes 88

References 91

Members of advisory committee 97 <