The Price Effects of an Emerging Retail Market

CNB working paper here

Nontechnical Summary
One of the most apparent changes in the Czech
Republic (one of the transition countries in Central
and Eastern Europe) –
one that daily influences every single inhabitant – is the change in the
way
people do shopping. At the start of the transition from a command to a
market economy, there
were chains of isolated small shops. Now, 15 years
later, a small number of large retailers operate
in extensive shopping
centers. This development poses the question of to what extent has such
a
significant and quick transformation of the retail market structure
affected the prices of retailed
products.
The available empirical evidence
on the price effects due to changing market structure is much
more often in
favor of the hypothesis that concentration causes price increases. There is
however,
no evidence so far for transition countries. In this original study,
the price effects of changing
market structure on retailed products are
evaluated by means of the size of the downstream and
upstream market power of
retailers during 2000–2005 in the Czech Republic.
Our findings suggest that
downstream market power was dominated by upstream market power
and thus
prices of retailed products declined, on average by 0.8 p.p. a year (2000–2005).
At the
same time, the tendency toward mergers and acquisitions among retail
chains, which had already
started in 2004, gradually leading toward a more
standard ratio of number of retailers to market
size – as observed in Western
countries, would cause average extra inflation of retail prices of 1.2
p.p.
(approximately 0.5 p.p. in the CPI) a year over the next ten years