Do LBO Supermarkets Charge More? An Empirical Analysis of the Effects of LBOs on Supermarket Pricing



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    • Graduate School of Business, University of Chicago. This is a revised version of Chapter 3 of my MIT dissertation. I am grateful to Chris James, Wally Mullin, Dick Schmalensee, Fiona Scott Morton, René Stulz, an anonymous referee, and especially David Scharfstein and Paul Joskow for comments and suggestions. I also appreciate the comments of seminar participants at the NBER 1993 Summer Institutes in Corporate Finance and Industrial Organization, the American Finance Association meetings, Cornell University, Harvard University, and the University of Maryland. Some of the data used in this paper were obtained from Information Resources Inc. with the help of John D.C. Little. Sabrina Bernold and Andrea Densham provided able research assistance. This work was supported by the Centel Foundation/Robert P. Reuss Faculty Research Fund at the Graduate School of Business at the University of Chicago.


This article examines changes in supermarket prices in local markets following supermarket leveraged buyouts (LBOs). I find that prices rise following LBOs in local markets in which the LBO firm's rivals are also highly leveraged and that LBO firms have higher prices than their less leveraged rivals, suggesting that LBOs create incentives to raise prices. However, I also find that prices fall following LBOs in local markets in which rival firms have low leverage and are concentrated. These price drops are associated with LBO firms exiting the local market, suggesting that rivals attempt to “prey” on LBO chains.