Competition in the Latvian and Baltic Grocery Retail Markets

New SSE Riga/BICEPS occasional paper by Anders Paalzow (SSE Riga) and Alf Vanags (BICEPS).

Abstract. This report analyzes concentration in the grocery retail market in the three Baltic countries: Estonia, Latvia and Lithuania. The markets (including some comparator Eastern and Western European markets) are analyzed using two standard measures: the Herfindahl Hirschman Index and the four firm concentration ratio. By applying a standard classification as used, for example by the US Department of Justice, the analysis reveals that the Latvian grocery retail market is competitive, the Estonian moderately concentrated, and the Lithuanian market highly concentrated. Given this observation, it is surprising that Latvia, where the grocery retail market is the most competitive (out of the three Baltic countries), is the country where further regulatory measures against the grocery retailers have been discussed the most.

Furthermore, in the light of the Latvian discussion on how to strengthen suppliers vis-à-vis retailers, the report analyzes some of the arguments, which have been used in the Latvian discussion to support the need for the proposed amendments to the Latvian Competition Law. A theoretical analysis of the concept of countervailing power and its relevance in the Latvian context shows that it is far from obvious that strengthening suppliers relative to retailers will benefit Latvian consumers. The report also examines the argument that the level of market concentration in the Baltic grocery markets (in particular the Latvian one) contributes to the relatively high Baltic inflation levels. There seems to be no support whatsoever for such a claim.