Competition and Product Quality in the Supermarket Industry

Abstract:     
This paper analyzes the effect of competition on a supermarket firm’s incentive to provide product quality. In the supermarket industry, product availability is an important measure of quality. Using U.S. consumer price index microdata to track inventory shortfalls, I find that stores facing more intense competition have fewer shortfalls. Competition from Wal-Mart, the most significant shock to industry market structure in half a century, decreases shortfalls by up to 24 percent. The risk of customers switching stores appears to provide strong incentives for investments in product quality.

Keywords: product quality, competition, monopoly, big-box, inventory management, stockout

JEL Classifications: D40, G31, L15, L81

Working Paper Series