Bad Neighbours? Local Price Competition in the Norwegian Grocery Retail Market

Abstract

The aim of this paper has been to examine the local competition between grocery retail stores in the Norwegian grocery retail market. Our attention has been on explaining the effect of market structure on prices. For this purpose we assemble an original dataset consisting of a selection of grocery retail stores in the city of Oslo, Norway. We construct several market structure variables based on different structural measures and employ a random-effects estimator to determine the relationship between market structure and prices, controlling for cost and demand factors as well as store characteristics.

First, our findings suggest that the variation in prices is directly related to the chain-concept affiliation of each store. Nonetheless, under the assumption that market structure is exogenous in our model, we estimate that (1) the distance to the nearest rival does not affect a store’s pricing behaviour, (2) the number of rival stores has a negative effect on a store’s price level, and (3) prices increase when there is at least one rival format in the local market.

However, if the assumption of exogenous market structure does not hold, which there is reason to believe, then our estimated relationship between price and market structure only expresses the correlation between the two.