The rise of discounters and its impact on concentration, market power and welfare

We quantify changes in concentration, market power and welfare in the UK grocery retail sector from 2002 to 2021. We document that an expansion of discounter-format retailers coincided with declining retail and manufacturer concentration across most narrowly defined product categories. We develop an equilibrium model that incorporates consumer choice over retailers and products with Nash-in-Nash bargaining between manufacturers and retailers. Applying this model to the breakfast cereals market, we find that discounter expansion - through store openings, efficiency gains and changes to products - reduced concentration and average prices, increased consumer and total surplus, and especially benefited households near newly opened stores.