Price and Variety in Supermarkets: Can Store Competition Hurt Consumers?

Abstract

Looking at a large number of markets, I find that (i) prices and variety are higher when there are two competing supermarkets than in those with a single store and (ii) the two effects are positively correlated. This pattern persists after controlling for differences across markets in a variety of ways.I present a model that explains these patterns. Stores choose prices and the number of products to carry and consumers decide which store to go to and what to buy. In the model: 1) Incentives to increase variety are higher for duopoly supermarkets because of the business stealing effect; 2) As more products become available, the potential surplus for each consumer increases, which allows stores to raise prices and still induce a purchase. These two forces combined result in equilibrium predictions consistent with the patterns in the data.In order to answer whether consumers are better-off in duopoly, when prices and variety are higher, I estimate consumer preferences. I find that consumer welfare is higher under competition. However, that is a result from the wider choice of products rather than lower prices.