Master Degree Project in Economics Competition in the Swedish Grocery Market An empirical study using the Boone-indicator Emelie Erdeljac Supervisor: Johan Stennek Master Degree Project No. 2014:65 Graduate School Abstract Boone (2008) proposed a new way of measuring competition based on relative profit differences. This way of measuring competition has theoretical superior properties than other common measures of competition used today. In this paper Boone’s way of measuring competition has been carried out on the Swedish grocery market where separate local markets have been defined on a municipality level. The Boone-indicator has been estimated for 284 of the 290 municipalities in Sweden between 2004 and 2013. Results suggest that the average level of competition is similar in all population size municipalities where the highest level of competition was observed in municipalities with and average population between 20,124 and 48,408. The lowest competition on average was observed in municipalities with an average population size greater than 48,408. In small size municipalities with less than 20,124 citizens on average, the Boone-indicators vary more. Contradictory to our expectations, the analysis suggest that high population density is in general associated with slightly lower levels of competition where high population densities are mainly associated with greater population size municipalities. Results support that factors affecting competition may be specific to the local markets and the variation in the level of competition observed for municipalities of similar character could not be fully explained by the current analysis. Future research should incorporate analysis of the distance between stores and its’ effect on competition as results may point to this as an important factor in explaining variation in competition. Acknowledgement I would like to express my gratitude to my supervisor Johan Stennek for his useful comments, remarks and engagement through the writing process of this master thesis. Furthermore I would like to thank Florin Maican for helping me with my model specification. I am thankful to my dear friend and classmate Sebastian Larsson for his encouragement and support throughout the process of writing this paper. My deepest gratitude goes out to my friends and family for their inexhaustible love and support, I am blessed to have you in my life. A special thanks goes out to my stepfather Mikael Holmström for always taking his time to listen and help guide me with my choices in life, thank you for believing in me. Lastly, I would like to thank the most important person in my life, my sister. Nathalie, you are my rock when the light in the end of the tunnel is an oncoming train. Thank you. Emelie Erdeljac Table of Contents Introduction ........................................................................................................................................ 6 Literature review ............................................................................................................................... 8 Competition measures and their shortcomings .................................................................................... 8 Overview of the grocery market industry in Sweden ........................................................................ 10 Theoretical analysis ........................................................................................................................ 13 The Boone-indicator .................................................................................................................................. 13 Defining geographic markets .................................................................................................................. 14 Empirical model estimation..................................................................................................................... 14 Empirical analysis ........................................................................................................................... 15 Data and Variables .................................................................................................................................... 15 Results ................................................................................................................................................ 17 The distribution of the Boone-indicator ............................................................................................... 17 The Boone-indicator and population size............................................................................................. 19 The Boone-indicator and population density ...................................................................................... 21 The impact of distance on the Boone-indicator .................................................................................. 24 The Boone-indicator and number of stores ......................................................................................... 26 Fraction of total population with access to grocery store ................................................................ 28 Fraction of population in urban areas with access to grocery store .............................................. 29 Fraction of population outside urban areas with access to grocery store .................................... 30 Summary of results .................................................................................................................................... 31 Discussion and suggestions for future research .................................................................................. 32 Conclusion ......................................................................................................................................... 34 References ......................................................................................................................................... 36 Appendix 1: The Boone-indicators.............................................................................................. 37 Appendix 2: Outliers ...................................................................................................................... 44 Positive Boone outliers .............................................................................................................................. 44 Negative Boone outliers ............................................................................................................................ 45 Municipalities with outlying negative Boone-indicator during half the sample period or more ........................................................................................................................................................................ 47 Appendix 3: Municipalities with normal Boone-indicators .................................................. 48 Appendix 4: The Boone-indicator and population density .................................................... 54 By population density quartiles .............................................................................................................. 54 Appendix 5: The Boone-indicator and the impact of distance ............................................. 55 Fraction of total population with access to grocery store ................................................................ 55 Fraction of population in urban areas with access to grocery store .............................................. 56 Fraction of population outside urban areas with access to grocery store .................................... 57 List of Tables Figure 1 - Histogram of distribution of Boone-estimates .................................................................. 18 Figure 2 - Boone-indicator and population ............................................................................................ 20 Figure 3 - Boone-indicator and population density ............................................................................. 21 Figure 4 - Boone-indicator and population density ............................................................................. 22 Figure 5 - The Boone-indicator and population density weighted by population size .............. 23 Figure 6 - The Boone-indicator and population density for different population sizes ............. 24 Figure 7 - The Boone-indicator and number of stores ........................................................................ 28 Figure 8 - The Boone-indicator and number of stores (less than 100) ........................................... 28 Figure 9 - The Boone indicator and access to grocery store ............................................................. 29 Figure 10 - The Boone-indicator and access to grocery store (urban areas) ................................ 30 Figure 11 - The Boone-indicator and access to grocery store (outside urban areas) ................. 31 Introduction Researchers such as Schiersch and Schmidt-Ehmcke (2010) point out that the study of competition suffers from lack of robust measures of the competitive environment in markets due to scarcity of data and poor indicators. This problem is further acknowledged by researchers such as Amir, 2003; Bulow and Klemperer, 1999; Rosenthal, 1980; and Stiglitz,1989, who show that one of the most widely used measures of competition, the price- cost margin (PCM), have theoretical shortcomings as competition increases. Boone, Harrison and Griffith (2005) discuss the same problem for