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Chain-Store Pricing and the Structure of Retail Markets

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Abstract

This paper examines competition between chain-stores and independent retailers in the UK retail opticians’ market. We demonstrate that the pricing policy adopted by chain-stores can determine the impact their entry has on independent retailers. Crucially, in this market the chain-store retailers set an identical national price across all local markets. Our results suggest that this pricing strategy lessens the detrimental effect competition from chain-stores has on independent retailers.

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Notes

  1. Burt and Sparks (2003).

  2. See for example New Economics New Economics Foundation (2005) and House of Commons, All Party Small Shops House of Commons (2006).

  3. See Davies et al. (2004, chapter 2) for a discussion of the impact deregulation had on competition.

  4. Fulop and Warren (1993, p.267).

  5. For example Tesco, the largest supermarket retailer in the UK.

  6. See Office of Fair Trading (OFT) (2009), para. 31.

  7. For example Staples and Office Depot in the US (see Dalkir and Warren-Boulton 1999).

  8. Commission Competition (2000), para. 2.409, p. 90.

  9. See Section 4.3 for a discussion of the impact of allowing chain-stores to set their quality level strategically.

  10. See for example Fulop and Warren (1993) pp. 262-64.

  11. Office of Fair Trading (OFT) (2009), para. 25.

  12. In the Dinlersoz model increasing returns to scale are not required, however, the minimum efficient scale for chain-stores must be sufficiently greater that of the independent retailers (see Dinlersoz 2004, p. 216). Under Cournot competition (see Section 2.3) this allows the chain-stores to expand output as the market size increases. Furthermore, once national pricing is introduced in Section 2.4 the predictions are unaffected by the specific chain-store cost function.

  13. Office of Fair Trading (OFT) (2009), para. 22-3.

  14. Office of Fair Trading (OFT) (2009), para. 31.

  15. This requires the quality level of a chain-store to be sufficiently high (but not as high as independents) so that even consumers with the lowest marginal utility (\(\underline {\alpha }\)) choose to buy the product (for the precise condition see Dinlersoz 2004, footnote 8).

  16. This requires a sufficient degree of product differentiation (see Dinlersoz 2004, footnote 9).

  17. This is shown formally in Dinlersoz (2004, p.218), Eq. 4.

  18. http://www.yell.com

  19. We omit the City of London LAD from the empirical analysis as it is principally a business area with a very low population but a comparatively large number of opticians.

  20. In addition, in 2009 Dolland and Aitchison and Boots were allowed to merger by the Office of Fair Trading (see OFT 2009).

  21. Each LAD is allocated to one of 9 administrative regions covering England e.g. South-West or London.

  22. However, Optical Express at the time had less than 6 stores in two of the regions. Furthermore, figures from OFT (2009, para 39.) show that in recent years Optical Express has continued to gain market share whilst the four chain-stores have all lost market share. However, even by 2007 Optical Express still had a market share by value of 4.3 %, which was over a third lower than the 4th largest chain (Boots) and, therefore, arguably still remains outside the main players.

  23. Office of Fair Trading (OFT) (2009), para. 39.

  24. UK main media advertising expenditure on opticians and eye clinics in 2001, Keynote (2002).

  25. The definition of a chain-store will also be widened to check for robustness of the results, see footnote 30 and 39.

  26. For example Toivanen and Waterson (2005) and Sadun (2013).

  27. Planning grants data is from the Office of the Deputy Prime Minister (ODPM). All the other variables are for 2001 except the wage data which is for 2005. Data Sources: Wage variable: Annual Survey of Hours and Earnings 2005, http://www.statistics.gov.uk/downloads/theme_labour/ASHE_2005/2005_res_la.pdf. All other variables: Census 2001, http://www.statistics.gov.uk/census2001/census2001.asp

  28. See Sadun (2013) for further details on the UK planning policy and this data.

  29. See for example http://www.insidermedia.com/insider/north-west/78166-specsavers-unveiled-latest- merseyway-tenant.

  30. This result is robust to various sensitivity tests (see Table 9 in Appendix A) involving the exclusion of: Scrivens, Optical Express and Rayner outlets from the definition of independent retailers (9.1); the largest 10 % of markets (9.2) or all London LADs (9.3).

  31. In contrast, if the number of major retail grants is included instead or in addition, this has no significant effect.

  32. In addition, if either the density or travel variables are included their coefficients were insignificant.

  33. See Greene (2003, p.788) for a formal description of the correction procedure.

  34. In addition, the lag in the planning data also alleviates concerns that political affiliation is in turn highly correlated with the local market conditions. Sadun (2013) uses the number of major planning grants as a measure of the entry (in any sector) of large retailers. Then, using political affiliation as an instrument, estimates the impact of such entry on employment by small retailers.

  35. Brown and Mergoupis (2010) show that this procedure also consistently estimates the interaction term in Eq. 10.

  36. This uses information on the joint distribution of Ninds and dumchain (see Maddala 1983, pp. 120-2.)

  37. All the results in Table 8 also remain very similar if the wage and age variables are left out from the chain-store equation.

  38. If we instead estimate (10) by the alternative two-step procedure which uses the probit estimation to correct for the endogeniety, whilst the coefficients remain similar in magnitude, dumchain and the interaction with market size are no longer significant at the 10 % level.

  39. Appendix B shows that this result is robust to the same sensitivity tests as earlier i.e. the exclusion of: Scrivens, Optical Express and Rayner outlets from the definition of independent retailers (10.2); the largest 10 % of markets (10.3) or all London LADs (10.4). In particular, when a narrower definition of an independent retailer is used there is stronger evidence that the coefficient on \(\log (Population)<1\). Additional results (available on request) suggest that when Eqs.9 and 10 are estimated jointly for these reduced samples, they are again independent.

  40. In additional estimations, we added further interaction terms into Eq.10 to test for the possibility that the number of independent retailers is also affected by the precise number of chain-store outlets or fascias present. However, the results (available on request) suggest that this is not the case. Instead, it is whether or not there is a chain-store present that seems to be important. This is consistent with the theoretical model described in Section 2, under national pricing. In addition, given the evidence suggesting that the Specsavers chain acts as an industry price leader (see Section 2.2), we have also looked into whether it is in fact the presence of this chain that has a key effect on independents. However, this appears to not be the case, again supporting the evidence that it is the presence of any chain that is important.

  41. This finding is also supported by the OFT (2009, para 26) who conclude that there is no evidence to indicate that over time competition from chain-stores has lead to a reduction in the number of independent opticians. Evidence is even provided that the other opticians have gained market share at the expense of the four main players (para. 39).

  42. A similar concern was also raised in a more recent Competition Commission investigation of the UK groceries market since, contrary to the period of the earlier investigation discussed in the introduction, most of the main players had by then adopted national pricing strategies (see Competition Commission (2006), paras. 4.98 and 8.25).

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Authors and Affiliations

  1. Economics and Strategy Group, Aston Business School, Aston University, Birmingham, B4 7ET, UK

    Matthew Olczak

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  1. Matthew Olczak
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Correspondence to Matthew Olczak.

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This is a revised version of Centre for Competition Policy, UEA, Norwich, Working Paper 06-7. I would like to thank Steve Davies for providing considerable support and advice, Paul Dobson, Raffaella Sadun and Steve Thompson for their assistance and an anonymous referee for their useful suggestions. The support of the Economic and Social Research Council (UK) is gratefully acknowledged.

Appendices

Appendix A: Robustness of the Results in Table 6

Table 9 The relationship between the number of independent outlets and market size when chain-stores are present
Full size table

Appendix B: Robustness of the Results in Table 8

Table 10 The relationship between the number of independent outlets and market size for all markets
Full size table

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Olczak, M. Chain-Store Pricing and the Structure of Retail Markets. J Ind Compet Trade 15, 87–104 (2015). https://doi.org/10.1007/s10842-014-0175-3

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