The effects of geographical competition and demand on grocery price premium

Abstract

Due to the duopolistic characteristics of the Finnish grocery retail trade proprietor-run stores operate as adaptive price setters on the market. This paper examined the effects of geographical competition and demand on proprietor-run grocery stores’ pricing in Finland’s most populated province –Uusimaa. The assumption is that the price premium of a proprietoroperated store compared to the nearest co-operative competitor reflects the characteristics of competition and demand. Hypotheses on the influence of competition environment and demand environment on proprietor-operated store’s price premium were constructed based on literature review. The respective prices of a twelve-item shopping basket were collected for the study by on-site observations in all of the supermarkets and hypermarkets in Uusimaa. A linear multiple regression analysis showed a statistical significance in explaining the price premium by average home floor space in a store’s catchment area and store format compared to the closest co-operative competitor. A semiparametric geographically weighted regression slightly improves the linear model.