Oxford Symposium: Trends in retail competition Pricing ... · Pricing, innovation and buyer power An Economist’s Perspective. COMPASS LEXECON 1 SETUP - THE MARKET ... Vertical differentiation
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Kadu Prasad
09 June 2017
Oxford Symposium: Trends in retail competition
Pricing, innovation and buyer power
An Economist’s Perspective
COMPASS LEXECON 1
SETUP - THE MARKET
Suppliers
Retailers
Customers
Wholesale prices
Retail prices
COMPASS LEXECON 2
WHOLESALE PRICES
Supplier Threats and
outside options
Retailer Threats and
outside options
Ability to switch to rivals
Market structure
Ability to vertically integrate
Scope of the portfolio
Scale of operations
COMPASS LEXECON 3
CHANGE IN MARKET STRUCTURE
Increase in retail concentration Increase in retail expansion
0 10 20 30Share of private labels
(%)
Portugal
Poland
Netherlands
Hungary
France
Czech Republic
Belgium
2004 2006 2008 2010 2012
Increase in private labels
COMPASS LEXECON 4
Effect of an increase in retail expansion
Effect of an increase in retail concentration
Effect of an increase in the market share of private labels
IMPACT OF CHANGE IN MARKET STRUCTURE: PRICES (I)
Supplier Threats and
outside options Retailer
Threats and outside options
Wholesale prices to large retailers are likely to reduce
COMPASS LEXECON 5
IMPACT OF CHANGE IN MARKET STRUCTURE: PRICES (II)
Waterbed effect Increased wholesale prices for fringe retailers
COMPASS LEXECON 6
Reduction in upstream profits ⇒ supplier incentive and ability to invest is reduced.
Reduced cash flows
Lower appropriability
Retailer incentive and ability to invest is increased.
Innovation more effective competition strategy for the suppliers
Vertical differentiation
Portfolio management
IMPACT OF CHANGE IN MARKET STRUCTURE: INNOVATION
Supplier innovations likely to reduce, retailer innovations may not increase
COMPASS LEXECON 7
IMPACT OF CHANGE IN MARKET STRUCTURE – VICIOUS CIRCLE
Increased retail concentration
and vertical integration
Increased bargaining power of
retail giants
Increased competitiveness of retail giants
Exclusion of fringe
retailers
Reduced supplier
innovation
COMPASS LEXECON 8
SUPPLIER STRATEGIES (I)
Do not disadvantage fringe retailers
COMPASS LEXECON 9
SUPPLIER STRATEGIES (II)
Create an advantage for fringe retailers
COMPASS LEXECON 10
SUPPLIER STRATEGIES (III)
Non-linear pricing for fringe retailers
Linear pricing (Per unit wholesale price only)
Non-linear pricing (Franchise fee + per unit wholesale price)
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