I have been hearing anecdotes from my friends in Europe that prices in supermarkets have increased since the last couple of months. Interested I had a look online and found a number of articles outlining this around the world.
According to the media, NZ shoppers have faced this as well.
“Some customers have taken to social media to complain that prices of items like soap, meat and fresh veggies have increased sharply.”
However, supermarkets kept denying the fact. It’s hard to judge the case from my experience, as Matt and I were lazy and were primarily eating outside before the lockdown. However, Stats NZ provides data here – so let’s look at the latest release on the Food price index to figure out whether the customers are right.
Spending on groceries
Before looking at this, let’s think about the what has happened. Fear around COVID and the quarantine by the end of March will have driven down demand for going out to restaurants, travelling, and going to movies – but driven up demand for groceries.
Why? People were keen to stock up in case they couldn’t get food, and as they aren’t eating out people now need to get more of their food from supermarkets (our case).
Stats NZ’s electronic card spending data indicates that this was indeed the case in March.
So we know that grocery store demand surged, so what does that mean for prices?
The food price index
Our initial economic intuition tells us, high demand in goods drives up prices as willingness to pay of consumers rises. This is reinforced by the fact that supermarkets were hitting their capacity constraints as noted by the comments around toilet paper.
But then this didn’t happen.
Stats NZ March food price index shows that grocery store food prices rose 0.2% in March relative to February when adjusted for seasonal variation.
The “real” figure is likely a bit larger, as supermarkets dialled back their “promotions” during the COVID crisis – and these deals are often not included in price statistics. Even so it looks like supermarkets haven’t increased prices in the face of rising demand, limited competition, and capacity constraints. Why??
Why haven’t supermarkets increased prices?
There are two clear categories for why they would not have increased price – the relationship between the price now and demand in the future, and imperfect competition.
For the first, the price supermarkets set now will influence demand for their store in the future. There are reputational effects from changing the price (goodwill) which are likely heightened during a pandemic, there are consumer expectations of prices which are anchored to the price now, and for franchise owners there is also the difficulty in getting them to coordinate prices with each other if you intend to significantly change the way products are priced.
In the current situation, supermarkets don’t want to get a reputation of not being kind – or of being price gougers – so will be sensitive to increasing the price.
The second is competition. If the two supermarkets were hypercompetitive and also had no market power over their wholesalers/suppliers then they would be forced to change prices with changes in supply and demand. But they haven’t. As a result, they could have market power in either of these markets.
On the sales side this could be a situation of tacit collusion. When demand is high supermarkets compete more to capture a share of the “high reward”, leading to a breakdown in tacit collusion that normally exists. Arguably, this idea is supported by the drop in grocery prices during December (Christmas).
Combining the concern about looking like bad people, and an increase in competition between supermarkets to get these new customers, it makes a lot of sense that they haven’t increased prices when faced with a surge in demand.
However, if demand remained higher forever, then these explanations suggest that eventually prices would rise – they only work because this is a temporary “high demand” or “high reputation cost” state. If restaurants are closed for a year expect to see more upward pressure on grocery prices.