Measuring the Market Power of Finnish Food Retailers

The last twenty years have witnessed substantial changes in retailing across most of Europe. The
concentration of retail buying has increased considerably, and this general evolution has been particularly
significant in Finland. For example, the top three supermarkets in Finland currently share 88% of the grocery
market. As established by the EU commission, a common consequence of high concentration in retailing is a
growing power of supermarkets over their suppliers, which may distort competition with upstream suppliers
(food processors, farmers). For instance, retailers may use their power to push costs and risks up the supply
chain, with the result that smallholder suppliers may be squeezed out. Downstream, consumers may also be
affected through less innovation, a reduction in choice and higher prices in the long-run.

However, while high concentration is a necessary condition for the existence of market power, it is not
sufficient. It is also well known that growing marketing margins, or the imperfect transmission of prices
along the food chain, may or may not be related to market power. Thus, the purpose of the paper is to
measure market power directly by using the conceptual framework developed in the New Empirical
Industrial Organisation. The paper presents a model suitable for that purpose and compatible with the
highly aggregated data available in Finland. The empirical application uses data from Tilastokeskus and
considers the three supply chains for cereal products, meat and dairy.

The results provide evidence that retailers in Finland have significant market power, particularly in the
cereals and meat sectors, and that the related distortions have an economically important impact on prices
offered to upstream suppliers and downstream consumers. However, the robustness of the results is limited
by the nature of the available data as well as the simplifying assumptions of the model. Further, it is evident
that other factors, and above all wages in retail, are also important in explaining growing retail margins in