Intra- and Inter-Format Competition Among Discounters and Supermarkets

49 Pages Posted: 2 Dec 2008

See all articles by Kathleen Cleeren

Kathleen Cleeren

Catholic University of Leuven (KUL) - Department of Applied Economics

M. G. Dekimpe

Catholic University of Leuven (KUL) - Department of Applied Economics; Erasmus Research Institute of Management (ERIM)

Katrijn Gielens

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Frank Verboven

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: September 2008

Abstract

The price-aggressive discount format, popularized by chains such as Aldi and Lidl, is very successful in most Western economies. Its success is a major source of concern for traditional supermarkets. Discounters not only have a direct effect on supermarkets' market shares, they also exert considerable pressure to improve operational efficiency and/or to decrease prices.

We use an empirical entry model to study the degree of intra- and inter-format competition between discounters and supermarkets. Information on the competitive impact of new entrants is derived from the observed entry decisions of supermarkets and discounters in a large cross-section of local markets, after controlling for a number of local market characteristics. In our modeling framework, we endogenize the retailers'entry decisions, and allow for asymmetric intra- and inter-format competitive effects in a flexible way.

We apply our modeling approach to the German grocery industry, where the discount format has stabilized after two decades of continued growth. We find evidence of intense competition within both the supermarket and discounter format, although competition between supermarkets is found to be more severe. Most importantly, discounters only start to affect the profitability of conventional supermarkets from the third entrant onwards. This may explain why many retailers rush to add a discount chain to their portfolio: early entrants may benefit from the growth of the discount-prone segment without cannibalizing the profits of their more conventional supermarket stores.

Keywords: empirical entry models, hard discounters, supermarket competition

JEL Classification: L10, M30

Suggested Citation

Cleeren, Kathleen and Dekimpe, Marnik and Gielens, Katrijn and Verboven, Frank, Intra- and Inter-Format Competition Among Discounters and Supermarkets (September 2008). CEPR Discussion Paper No. DP6964, Available at SSRN: https://ssrn.com/abstract=1308035

Kathleen Cleeren (Contact Author)

Catholic University of Leuven (KUL) - Department of Applied Economics ( email )

Leuven, B-3000
Belgium

Marnik Dekimpe

Catholic University of Leuven (KUL) - Department of Applied Economics ( email )

Leuven, B-3000
Belgium
+32 16 326 957 (Phone)
+32 16 326 732 (Fax)

HOME PAGE: http://www.econ.kuleuven.ac.be/tew/academic/market/members/MarnikDekimpe.htm

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1715/9576 (Phone)
+31 10 408 9011 (Fax)

HOME PAGE: http://web.eur.nl/fbk/dep/dep3/about/members/people/mdekimpe

Katrijn Gielens

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 408 8635 (Phone)
+31 10 408 9011 (Fax)

Frank Verboven

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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