Asymmetric adjustments of prices between supermarkets and non-supermarkets

Abstract

Consistent with the development in other advanced countries, market concentration in the Hong Kong grocery industry has increased over the past few decades with the domination of a few large supermarket chains. However, no research has been conducted on the competitive dynamics between the supermarket and non-supermarket sectors to discover whether the non-supermarket sector can impose competitive discipline on the dominating supermarket chains or not. Standard linear cointegration and Granger causality tests, however, cannot distinguish whether the price co-movement is caused by market competition or collusion. To overcome this weakness, our research study uses multivariate tests of threshold cointegration in a three-regime threshold vector error-correction model (TVECM) that capture asymmetric price adjustments allow for transaction costs. Our results confirm the presence of cointegration between these supermarket and non-supermarket price indexes with asymmetrical threshold adjustment dynamics. We also find that supermarket and non-supermarket sectors are competing in the relevant market when they adjust their prices asymmetrically downwards only in response to relatively lower prices offered by the competing sector. The adjustment speeds and thresholds are also asymmetric depending upon competitive behaviors and transaction costs in grocery market.