Dynamics in a Mature Industry: Entry, Exit, and Growth of Big‐Box Grocery Retailers

• Published date: 01 March 2015
• Author: Daniel Hanner,Loren K. Smith,Luke M. Olson,Daniel Hosken
• DOI: http://doi.org/10.1111/jems.12087
• Date: 01 March 2015

Dynamics in a Mature Industry: Entry, Exit, and

Growth of Big-Box Grocery Retailers

DANIEL HANNER

U.S. Federal Trade Commission

600 Pennsylvania Avenue, NW

Washington, DC 20580

dhanner@ftc.gov

DANIEL HOSKEN

U.S. Federal Trade Commission

600 Pennsylvania Avenue, NW

Washington, DC 20580

dhosken@ftc.gov

LUKE M. OLSON

U.S. Federal Trade Commission

600 Pennsylvania Avenue, NW

Washington, DC 20580

lolson@ftc.gov

LOREN K. SMITH

Compass Lexecon

1101 K Street NW

Washington, DC 20005

LSmith@CompassLexecon.com

This paper measures market dynamics within the U.S. grocery industry (defined as supermarket,

supercenter,and club retailers). We find that despite being a mature industry, the groceryindustry

is remarkably dynamic. Each year retailers open or close roughly 7% of U.S. stores. We also find

significant changes in the size of firms’ operations within markets over time. These changes in

relative size are largely the result of expansion or contraction by incumbents rather than the

result of firm entry or exit. In fact, entry and exit are quite rare, except by small firms. Moreover,

only in small markets do new entrants gain substantial market share.

1. Introduction

Entry and exit by firms play an important role in generating economic growth and

are key elements of the competitive process in the long run. Foster et al. (2006), for

example, find that virtually all of the labor productivity growth in the retail sector in

the 1990s was the result of entry and expansion by high productivity firms and the

exit of less productive firms. What is less clear is when entry and exit play an im-

portant role in disciplining markets in the intermediate run—2 to 5 years—which is

We thank Christopher Adams for his help in getting this project started and Joseph Farrell, David Schmidt,

Christopher Taylor, Steven Tenn, Matthew Weinberg, Nathan Wilson, and two anonymous referees for com-

ments. The views expressed in this paper arethose of the authors and do not represent those of the U.S. Federal

Trade Commission or any individual Commissioner.

Published 2015. This article is a U.S. Government work and is in the public domain in the USA.

Journal of Economics & Management Strategy, Volume24, Number 1, Spring 2015, 22–46

Big-Box Grocery Retailers 23

the relevant time period for antitrust authorities in developing an effective competi-

tion policy. The U.S. government’s primary policy document describing merger pol-

icy, the 2010 Department of Justice (DOJ)/Federal Trade Commission (FTC) Horizontal

Merger Guidelines, describes the conditions under which entry (or the threat of entry) can

cause seemingly anticompetitive mergers to be permissible.1In particular,the Guidelines

note that, “the prospect of entry into the relevant market will alleviate concerns about

adverse competitive effects only if such entry will deter or counteract any competitive

effects of concern so the merger will not substantially harm customers.” Hence, even

if merger induced entry would eventually eliminate competitive harm, that merger is

still illegal if customers suffer substantial harm as the market moves back toward a

competitive equilibrium.

Determining whether entry would be easy and sufficient to replace the loss of

competition resulting from a merger has proven difficult. Werden and Froeb (1998), for

example, examine models with Cournot and Bertrand competition and find that with

plausible levels of sunk costs, anticompetitive mergers are unlikely to generate entry.

Notwithstanding this finding, courts have found that evidence of likelihood of entry

into a market substantially lessens the concern that a merger in that market would be

harmful (see, e.g., U.S. v. Syufy Enterprise, 1990; U.S. v. Baker Hughes, 1990).

Surprisingly, given the importance of entry in antitrust analysis, there is relatively

little detailed economic research examining intermediate-run market dynamics in the

narrow product categories that are typically the focus of antitrust analysis.2The purpose

of this paper is to develop this type of evidence by focusing intensively on a single

important industry, big-box grocery retailing in the U.S., over a five-year period. Retail

markets are often viewed as markets in which entry and expansion should be relatively

easy such that even the threat of entry is seen as sufficient to maintain competition

(U.S. v.Syufy Enterprise, 1990). Relative to many sectors, entry requirements in retailing

markets are not particularly onerous. With an existing supply network, a retailer need

only identify an effective location and obtain permission from local regulators to open an

establishment. Notwithstanding the perceived ease of entry and expansion, mergers in

retail markets are often subject to material antitrust review. Between 1998 and 2007, for

example, the FTC investigated supermarket mergers affecting 153 antitrust markets and

challenged mergers in 134 of those markets.3Evidence on observed market dynamics in a

retail market provides important information that can allow regulators to better evaluate

the credibility of claims that potential entry or expansion by incumbents can discipline

markets in response to mergers that substantially increase market concentration.

Our paper has six findings. First, we find that despite being a mature industry,the

big-box grocery retailing is remarkably dynamic. While the number of big-box grocery

outlets operating in the U.S. has remained roughly constant, each year roughly 7% of

retail outlets either open or close. Some of this turnover is the result of rapid growth

of supercenter and club retailers at the expense of traditional supermarkets. Still, even

traditional supermarket retailers continue to open new stores representing roughly 2%

of the stock of existing stores each year.

Second, we find that entry and exit are quite common for small independent

supermarkets (single outlet firms) and supermarkets owned by small chains (chains with

1. U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (2010),

section 9.

2. Notable exceptions are studies of the cement industry (e.g., Syverson, 2008), the airline industry (e.g.,

Goolsbee and Syverson, 2008), and the banking industry (e.g., Berger et al., 2004).

3. See FTC (2008), Table 4-2.