Evaluating a Supermarket Merger Event: The Case of Copps and Kohl’s in Madison WI

Funding for the project and data collection efforts were graciously provided by the Food System Research Group. The authors thank Igal Hendel for detailed comments and discussion, and Dana Bauser for assistance in compiling the data. All views, interpretations, recommendations, and conclusions expressed in this document are those of the authors and not necessarily those of the supporting or cooperating organizations. Readers may make verbatim copies of this document for noncommercial purposes by any means, provided that this copyright notice appears on all such copies. i Executive Summary This monograph is a compilation of research on the merger of Copps and Kohl's supermarkets that took place in the spring of 2003 in Madison, Wisconsin. A distinct feature of our data, collected initially from March 2003, one month before the acquisition , through September 2003, is that it allowed us to assemble price and promotion information for all major competitors in Madison's supermarket sector. With both pre-and post-merger information, the research provides empirical evidence of how acquiring and non-acquiring firms responded in the short run to a significant structural change in two primary strategic variables: price and advertising. Additionally, data were collected on price and promotion activities for the same weeks in 2005. The additional data were used to evaluate the possibility of long-run structural pricing adjustments in the Madi-son market. To account for possible confounding effects from a wide range of potential demand and supply shocks, the price impacts of the merger were carefully controlled using same period and product prices in the Green Bay, Wisconsin market area. Four acquisition phases were identified and used throughout the study. They were: Phase I: Pre-acquisition period Phase II: Kohl's store closures Phase III: Copps grand openings Phase IV: Post-grand openings Numerous interesting findings are forthcoming from the analysis. Basic Pricing Patterns: The Madison market is quite diverse in its pricing across each chain. Based on our price data of 47 food items and controlling for holiday effects and acquisition phases, there remained a 25% price wedge between the highest-and lowest-priced chains. Despite sizable geographic-based income variation across the city and natural geographic barriers caused by a large lake system, we found no evidence of zone pricing commonly observed in larger cities. Indeed, our random effects coefficient on within-chain pricing was near zero, indicating no pricing variability within chains across the entire Madison market. Short-run price impacts: One major focus of the study …