The Geography of Grocery Demand in the UK: An Evaluation of the 2003 Morrisons-Safeway Merger

Abstract:     
In 2003, the UK Competition Commission (CC) approved the acquisition of Safeway plc by Wm. Morrisons plc, respectively the fourth and sixth largest firms in the industry. Because Morrisons focused on the North and Safeway on the South, this merger had the potential to create a fourth national champion to rival Asda, Sainsbury’s, and Tesco, hopefully improving competition, lowering prices, and improving quality for consumers. But, the merger could also have had an adverse affect on competition by creating pockets of local market power which the merged firm could exploit. To evaluate the CC’s decision, I construct a geographic distribution of demand which models the local interactions between consumer demographics and store locations. My model has several parts. I estimate a Discrete/Continuous structural model of demand from a high quality panel of consumer micro-data (the TNS Worldpanel) to explain both store choice and conditional demand for groceries. After combining this demand system with disaggregate census data, I recover marginal costs and then predict store-level sales and profits as well as willingness-to-pay. I use these tools to evaluate the welfare implications of the merger and of a counter-factual merger between Safeway and Tesco. I find that the changes in prices, profits, and consumer welfare under either merger are quite small – although larger for a Tesco-Safeway merger. Although consumers are slightly worse off under these mergers, the results support the UK Competition Commission’s approval of the merger.

Number of Pages in PDF File: 60

Keywords: Product differentiation, merger analysis, geographic distribution of demand

JEL Classification: L13, L40, L81, D4

working papers series