Blog Posts Xavier Irz Uncategorized

Throughout the Western world, the industrial structure of food supply chains has changed dramatically in the last decades. A common characteristic of this transformation is the emergence of large retailers and their growing influence on the supply chain.

Finland represents an extreme case of this evolution, with two retail chains controlling over 80% of the market1. Food prices in the country also exceed the EU average by more than 20%2, and casual price comparisons reported in the press often conclude to large price differentials across retail stores3.

Those combined observations lead to a simple question: do Finns pay too much for food due to a relative lack of competition in food retail? Economists have long recognised that a lack of competition generates inefficiencies which increase costs and raise prices, resulting in a relatively comfortable life for suppliers but excessive prices for consumers. My own casual observations derived from conversations with taxi drivers and other “key informants” indicate that most Finns tend to agree.

The explanation of high food prices by lack of competition is not the only possible one.

The US president Harry Truman famously asked to be sent a one-armed economist, having got tired of exponents of the dismal science proclaiming “On one hand, this” and “On the other hand, that”. At the risk of sounding like a two-armed economist, I should point out that, as intuitive as it may be, the explanation of high food prices by lack of competition is not the only possible one. For instance, retailers’ costs are also influenced by relatively high wages in food retail and high value-added taxes in Finland.

Thus, in response to concerns about the functionality of Finnish food markets, Luke initiated an empirical study to investigate how retail structure in local food markets influenced food prices as part of the RUOMU project, funded by the Ministry of Agriculture and Forestry. We used a natural experiment created by the entry of Lidl in a typical mid-size Finnish town to analyse how food prices changed in incumbent retailers (i.e., those present before Lidl entry) as a result of increased competition (i.e., launch of the Lidl store).

The key hypothesis was that, if incumbent retailers held significant market power, they would strategically adjust their prices downwards as a result of Lidl entry. On the other hand, if food markets operated close to efficiency, existing retailers would have little room for price adjustments and large price changes would not be observed.

Finnish food price competition appears relatively healthy.

Prices were collected for 500 foods in each store before and after Lidl entry over 11 months. The possibility that food prices may vary as a result of factors unrelated to local competition, such as supply shocks, was taken into account by collecting prices in a “control location” – that is, another mid-size town similar to the first one but where Lidl was not present and did not launch a store over the study period.

The hypothesis of large, over-the board strategic price responses by incumbent supermarkets to the entry of Lidl was rejected, although we found some small strategic response for the specific category of national brands and one of the incumbent retail chains. Having a limited scope and not addressing other important aspects linked to competition – e.g. impact on innovation, food processors and primary producers, or the longer term and nation-wide impact of the arrival of – this case study was not an ultimate test.

However, the results were reassuring about the functionality of Finnish food markets as they did not reveal stark reactions by retailers to deter entry by competitors. Hence, local food price competition appears relatively healthy from the point of view of the Finnish consumer, even if that conclusion goes against the common wisdom and  sensationalist headlines.

Sources:

1 PTY report entitled Päivittäistavarakauppa 2018, accessed 18.12.2019.

2 EUROSTAT  NEWSRELEASE 101/2019, published 20 June 2019, accessed 18.12.2019.

3 As an example, see Helsingin Sanomat article entitled “HS vertaili ruoka­korien hintoja – Lidl pysyi halvimpana, ja hintavin kauppa oli sitä noin 68 prosenttia kalliimpi” (only in Finnish)

4 EUROSTAT infographics, How much are households spending on food?, accessed 18.12.2019.

More information:

Irz, X., Jansik, C., Liu, X., Niemi, J. (2020). Impact of market entry on local food price competition: A quasi-experimental study of the “Lidl effect”. Maataoustieteen Päivät, Helsinki, Finland.

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