Retailer Power: Recent Developments and Policy Implications

Retailing is bigger than people think. In their paper published in the journal Economic Policy No. 28 (published by Blackwell Publishers for CEPR, CES and DELTA), Paul Dobson (University of Loughborough) and Michael Waterson (University of Warwick) discuss the potential power of the new giants of European retailing in particular. They note that the fourth largest company in the world is the US retailer Wal-mart. Two supermarket chains rank in the UK’s top ten companies. Belgium’s largest company, ranked by revenue, is a retailer. And concentration is growing in many areas, for example retail grocery, in virtually all EU countries.  Potentially then, retailers have significant and growing power.  How do they exercise their power?  And is the way they do it damaging to society’s interests?  Many consumers, and others, believe that what seem to be significant price differences for identical goods across countries are the result of retailers’ actions and their different strengths in different countries.  This is hotly contested but if this is so, there are implications for policy.

One view is that, although the power of major retailers is growing, this need be of little concern. Proponents of this view argue that entry into retail markets is easy and will therefore happen swiftly if established players over-exploit their dominant power in the sector.  Unfortunately, this is unlikely to be true in practice for several reasons.  One key factor is that new large-scale retailing developments, thanks to their potentially damaging impact on the local environment, can face tremendous opposition, thereby giving a significant advantage to incumbent operators.  Planning clearance for new operators is a barrier to their entry in most EU countries.  There is also evidence that the power of established retailers is increasing, and that the margins they can obtain are rising.  Moreover, the degree to which famous retail names have become brands in their own right is developing further.  Of course, in the face of powerful manufacturers, this developing power may have positive features.  However other analysis suggests the scope for such countervailing power is rather limited.  But, the authors argue, a blanket approach to policy on retailer power would be undesirable.

Two specific policies stand out in particular cases.  The first concerns vertical linkages – those with suppliers.  Here the trick for competition authorities is to tackle the cases which create policy problems (primarily, those which strengthen horizontal market power), without removing the ability of firms to negotiate sensibly around the natural problems which arise in making normal vertical arrangements.  For example, exclusivity arrangements (exclusive dealing, exclusive distribution) may facilitate selling and promotion activities but can also diminish competition between firms.  Moreover, any remedy has to bear in mind what would happen after a specific policy change has been imposed - firms might react so as to reduce the impact of any structural remedy.  For example, disallowing vertical integration through limitations on ownership downwards may lead to contractual arrangements with a similar effect.  Therefore no straightforward policy pronouncement can be made and a case-by-case approach is clearly required.  In addition simple rules restricting retailer behaviour, like those in France, which prevent or limit hypermarket expansion and advertising, may be feasible but can give rise to their own distortions. 

The second policy area concerns mergers between retailers.  The important but difficult question is how much retail concentration is desirable.  In Eurpact on competition. However, our analysis points to a much less sanguine conclusion and we suggest that retail mergers should be subject to significant scrutiny. Finally, policy needs to bear broader concerns in mind - one of the considerable barriers to the entry of new retailers and new retailing systems is the structure of planning arrangements, but here environmental and other more political concerns come into play alongside economics.ope, there has been a tendency until quite recently to view such mergers as having little im

Notes for Editors:

Paul Dobson is based at the University of Loughborough.

Michael Waterson is based at the University of Warwick.              

Economic Policy is published in association with the European Economic Association for the Centre for Economic Policy Research, the Center for Economic Studies of the University of Munich and the Département et Laboratoire d’Economie Théorique et Appliquée (DELTA), in collaboration with the Maison des Sciences de l’Homme.