Price competition between big and small supermarkets: evidence from Seoul

ABSTRACT 

This article empirically investigates the level of competition between superstores and smaller retailers in the Korean retail industry where market entry and operational hours of the former are restricted in order to protect the latter. Applying spatial econometric methods to store-level price data from Seoul, we find that while spatial price correlations among same-size stores exist, product prices across different-size stores are spatially uncorrelated. This result implies that consumers may not view superstores’ and smaller retailers’ products as close substitutes, and thus their markets are likely to be segmented from each other.

KEYWORDS:

• Superstores
• smaller retailers
• price competition
• spatial autoregressive model

JEL CLASSIFICATION:

• C21
• L11
• L51
• L81

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The Distribution Industry Development Act restricts the entry of large discount stores and super supermarkets within a 1-kilometer radius of traditional markets and requires them to close on two Sundays every month.

² Here we use the term ‘superstores’ for large discount stores such as Wal-Mart and super supermarkets that are relatively small-scale chain retailers usually run by large discount stores. The term ‘smaller retailers’ is used for independent small and medium-size supermarkets.

³ Store size can be an important dimension of differentiation. Using data from Tokyo, Igami (2011) finds that large supermarkets displace large and medium-size rivals, but improve small stores’ survival rate.

⁴ Applying spatial econometric techniques to hamburger prices surveyed from 1385 restaurants of the four largest chains in Texas, Kalnins (2003) finds that prices across chains are spatially uncorrelated and concludes that customers do not view hamburgers of different chains as close substitutes.

⁵ http://www.consumer.or.kr

⁶ The city of Seoul is divided into 25 administrative districts (see Figure 1).

⁷ 1000 Korean won is roughly equivalent to 1 US dollar.

⁸ Here, we treat each product as an independent market. Considering duopoly competition with two goods and two types of consumers, Shelegia (2012) shows that when the goods are independent or weak substitutes (as in our sample products), their prices are uncorrelated. Nevertheless, it would be interesting to see whether co-pricing of products exists.

⁹ The distance between two stores is calculated using the great circle distance method.

¹⁰ That is, prices of the products are strategic complements.

¹¹ Baltagi and Liu (2011) extend the instrumental variable estimators of Kelejian and Prucha (1998) proposed for the cross-sectional spatial autoregressive model to the panel data setting.

¹² This may be addressed by a better choice of instrumental variables (Anselin 1988).

¹³ In their work examining the effectiveness of Korea’s Sunday superstore shopping regulation, Choi and Jeong (2016) suggest that the regulation decreases consumers’ welfare by raising the opportunity cost of their shopping hours.