Price convergence in the UK supermarket chains: Evidence from nonlinear cointegration approach

Kai Yin Woo, Shu Kam Lee

Abstract


Supermarket chain is an important sector of the UK grocery stores and the growing dominance of supermarket chains has brought public concern over exploitation of market power in the UK retail grocery industry. This paper therefore aims to examine the price convergence of the UK supermarket products. Since the cointegrating relationship between supermarket prices may not be exact or linear, we adopt the rank tests for analysis which do not require prior knowledge and specification of the linear or nonlinear functional form. Our results confirm the evidence of the price convergence of all grocery products and then validate the price competition between the UK supermarket chains. Furthermore, a subset of the cointegration relationships exhibits nonlinear long-run price co-movements.


Full Text:

PDF

References


Baumol, W. J., Quandt, R. E., and Sharpiro, H. T. (1964) Oligopoly theory and retail food pricing, Journal of Business, 37, 346-363.

Breitung, J. (2001) Rank tests for nonlinear cointegration, Journal of Business and Economic Statistics, 19, 331-340.

Chakraborty, R., Dobson, P. W., Seaton, J. S., and Waterson, M. (2015) Pricing in inflationary times: The penny drops, Journal of Monetary Economics, 76, 71-86.

Chang, T. Y., and Su, C. W. (2013) Revisiting purchasing power parity for East Asian coun-tries using the rank test for nonlinear cointegration, Applied Economics, 45, 2847-2852.

Competition Commission (2000) Supermarkets; A report on the supply of groceries from multiple stores in the United Kingdom, UK: Competition Commission.

Competition Commission (2008) The supply of groceries in the UK market Investigation. UK: Competition Commission. Available from: http://www.ias.org.uk/uploads/pdf/Price%20do cs/538.pdf

Cowan, S. (2007) The welfare effects of third-degree price discrimination with nonlinear demand functions, RAND Journal of Economics, 38, 419-428.

Dhar, T., Chavas, J. P., Cotterill, R. W., and Gould, B. W. (2005) An econometric analysis of brand-level strategic pricing between Coca-Cola Company and PepsiCo, Journal of Economic and Management Strategy, 14, 905-931.

Engle, R. F., and Granger, C.W.J. (1987) Co-Integration and error correction: representation, estimation and testing, Econometrica, 55, 251-276.

Haug, A. A., and Basher, S. A. (2011) Linear or nonlinear integration in the purchasing power parity?, Applied Economics, 43, 185-96.

Lan, H., and Dobson P. W. (2017) Healthy competition to support healthy eating? An investigation of fruit and vegetable pricing in UK Supermarkets, Journal of Agricultural Economics, 68, 881-900.

Liew, K. S., Ling, T.H, Chia, C. J., and Yoon G. (2012) On the application of the rank tests for nonlinear cointegration to PPP: The case of Papua New Guinea, Economic Modelling, 29, 326-332.

Lloyd, T. (2008) Price leadership in UK food retailing: Time series representation and evidence. Paper presented at the 82nd Annual Conference of the Agricultural Economics Society, Cirencester, UK.

Mackinnon, J. G. (1996) Numerical distribution functions for unit root and cointegration tests, Journal of Applied Econometrics, 11, 601-618.

Maskin, E., and Tirole, J. (1988) A theory of dynamic oligopoly, II: Price competition, kinked demand curves and Edgeworth cycles, Econometrica, 56, 571-599.

Martin, S. (2002) Advanced industrial economics, Oxford: Blackwell.

Revoredo-Giha, C., and Renwick, A. (2012) Retailers price behavior in the UK fresh fruit and vegetable market, Agribusiness, 28, 451–468.

Scrimitore, M. (2003) Symmetric and Asymmetric Equilibria in a Spatial Duopoly, 43rd Congress of the European Regional Science Association: "Peripheries, Centres, and Spatial Development in the New Europe", 27th - 30th August 2003, Jyväskylä, Finland, European Regional Science Association (ERSA), Louvain-la-Neuve.

Seaton, J. S., and Waterson, M. (2013) Identifying and characterizing price leadership in British supermarkets, International Journal of Industrial Organization, 31, 392–403.

Stock, J. H., and Watson, M. W. (1993) A simple estimator of cointegrating vectors in higher order integrated systems, Econometrica, 61, 783–820.

Tabuchi, T. & Thisse, J. F. (1995) Asymmetric equilibria in spatial competition, International Journal of Industrial Organization, 13, 213-227.

Taylor, M. (1988) An empirical examination of long-run purchasing power parity using cointe-gration techniques, Applied Economics, 20, 1369-1381.

Vasquez-Nicholson, J. (2016) Retail Foods, USDA'S Global Agriculture Information Network (GAIN).

Verdict Research (2008) Food and Grocery 2008.

Woo, K. Y., Lee, S. K., and Shum, P. (2017) Analysis of threshold cointegration with asymmetric adjustments in the Hong Kong grocery industry, Applied Economics, 49, 5591-5560.

Xu, J., and Hajek, B. (2013) The supermarket game, Stochastic Systems, 3, 405-441.




DOI: https://doi.org/10.17811/ebl.7.3.2018.115-125

Refbacks

  • There are currently no refbacks.


ISSN: 2254-4380