Retailers price behavior in the UK fresh fruit and vegetable market

Abstract

The recent announcement in the UK by the largest supermarket chain (Tesco) of a sustained reduction in prices across a range of own-label products has once again focused attention on the issue of the nature of price competition between supermarkets. In this article, the authors inform the discussion on the issue of price competition through analysis of the interaction in the pricing behavior for fresh produce of two leading UK supermarkets, Tesco and Sainsbury's, over a 10-year period with the purpose of improving understanding of how they compete and the possible policy implications. Of particular interest is whether the nature of the interaction in pricing behavior between the two retailers changed as they moved from a situation where they had relatively similar market shares to one where Tesco became the dominant force in retailing in the UK. Through the literature possible price-leadership models are investigated and their empirical characteristics identified. The empirical analysis consisted of the investigation of price leadership using Granger causality tests on the series. In addition, due to the nature of the findings, interrelationships between the supermarket prices were modelled by means of vector autoregressive models for each product and the simulation of interactions between retailers using impulse-response functions. Though no clear evidence of systematic price leadership from Tesco to Sainsbury's was found, the results point to a strengthening interrelationship between the pricing of the two supermarkets over the period for a number of the products examined, which may be a result of the increased use of price checking across supermarket chains as a competitive tool. [JEL classifications: L000, L190, L130, C320].