The power of two: squaring off with Australia's large supermarket chains *

David K. Round

Australian Journal of Agricultural and Resource Economics, 2006, vol. 50, issue 1, pages 51-64

Abstract: The level and nature of competition in supermarket retailing in Australia has been hotly debated as a policy issue in recent times. The creeping acquisitions of smaller groups by Coles and Woolworths have led to several investigations amid claims that consumers will be disadvantaged by the growth of the two big chains. Yet little convincing evidence has been found to support these assertions. Although on occasions the big two may have used their power vertically to squeeze suppliers, consumers have experienced highly competitive retail markets. In this paper, it is argued that it is market conduct, not structure, that should be the prime focus of regulatory and policy interest, and that recent corporate activity may lead to a third force in supermarket retailing in Australia that could not only ensure continued competitiveness in the industry, but could also help to constrain the successful exercise of vertical market power by the two big chains. Accordingly, it is argued that intervention as a general policy in supermarket retailing would not be socially efficient, at least not until a wide range of objective and quantitative assessments have been carried out on the operation of the supermarket sector. Copyright Australian Agricultural and Resource Economics Society Inc. and Blackwell Publishers Ltd 2006.

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