The Strength of Competition in the Swedish Grocery Retailing Market. A Comparison to Germany

Abstract

I have many times heard that the Swedish grocery retail market has low competition, high concentration and high food prices, whereas in Germany the prices are considered lower and the competition more intense . I decided to investigate if this claim is true and if the market structure in Sweden is likely to be a problem. The study shows that Sweden and Germany have the same strength of competition and entry barriers in the grocery retailing market. I also discovered that the competition in both Sweden and in Germany get more intense when new chains enter the market. To reach these results the relationship between store density and population density was estimated, showing there is no difference between the countries in the number of costumers per chain a grocery retailer needs to retain the same profit when the number of chains is increasing. This is referred to as the strength of competition in the market. The idea is that if more costumers per chain are required to reach the intended profit level, it indicates an intensified competition due to increased price pressure and smaller profit margins. Furthermore, I found that Sweden has a higher degree of concentration in the grocery retailing market. Although, the fact is that Sweden has a large surface relative Germany but a much smaller population. Therefore the high concentration in Sweden is most likely a result of economies of scale coming from natural market conditions, rather than a result of high entry barriers and an inefficient market. I have distinguished between the level of competition and the strength of competition. The strength of competition is the increase in competition one additional chain in the market creates and the level of competition shows the accumulated competition all chains in the market have contributed to. When studying concentration I conclude that the level of competition in Germany must be higher than in Sweden. There are more stores and more different chains competing with each other in Germany. Each new chain established in both Sweden and in Germany creates equally much additional competition, yet there are more chains in Germany contributing to the accumulated level of competition. Finally, the outcome shows that the competition intensifies in both countries when a new chain is established in the market. When population density increases by one per cent, chain density increases by 0.86 per cent, indicating that each chain needs more customers per chain to retain the same profit when the number of chains increases. This in turn implies increased price pressure and then also increased competition.