Aldi Is Coming to Denver
Some thoughts on defining relevant markets
Last month, the Denver Post reported that the grocery chain Aldi submitted plans to open its first two locations in Denver. This came after an announcement by Aldi earlier this year about plans to open more than 50 stores along the Front Range. I used to live in the D.C. area, where Aldi already had several locations, and never really shopped there, but I see the appeal for many people (I do almost all my grocery shopping at Walmart). But watching Aldi officially move forward with stores in Denver and around Colorado got me thinking about the blocked merger between Kroger and Albertsons a couple years ago.
The merger between the two chains, two of the largest in the country, was challenged in part on the grounds that it would limit options and create market power that could lead to higher prices for consumers. Colorado’s attorney general, Phil Weiser, now the Democratic nominee for governor, was among the state attorneys general who sued to block it. The FTC brought the federal case in Oregon, while Weiser sued in Denver District Court.
In December 2024, the federal judge and a state judge in Washington blocked the deal, and Albertsons walked away the next day. Weiser’s case went to trial in Denver but never got a ruling. Once the deal was dead, the claims were dismissed as moot. The decision has been made and I am not going to rehash all the arguments but for this post I want to talk a little about why it is important to think carefully about defining markets when trying to answer a question in economics.
Defining the relevant market
Part of the case against the grocery merger hinged on the definition of the relevant market Kroger and Albertsons were competing in. This matters because what kind of behavior we can expect from the merged grocery entity depends on who their competitors are. And who their competitors are depends on how we define the market.
For example, we might define the relevant market for Kroger and Albertsons as only other supermarket chains. That is, stores that primarily sell groceries. Kroger’s Colorado brand, King Soopers, competes with other supermarkets. And if two of this market’s largest chains merged, they would be able to out-compete smaller chains, or in some areas be the only game in town. If that were allowed to occur, the merged chain would lose its closest head-to-head rival, and with it the competitive pressure that rivalry puts on prices.
This story has some economic logic to it. However, the key assumption is that the relevant market is only other supermarkets and that may miss other competitors that would alter the predictions being made. But in the federal case against the merger, the government’s definition was not as narrow as I’m putting it here to make the point. Supercenters like Walmart and Target, which sell groceries alongside everything else, counted as relevant competitors. Specialty and health food stores like Sprouts, Whole Foods, Natural Grocers, and maybe somewhere like Locavore were explicitly out though. Also out were warehouse clubs like Costco, discounters like Aldi and Trader Joe’s, dollar stores, and Amazon.
The Gunnison example
Weiser’s complaint against the merger used the same definition of the relevant market as the federal case. But in a small enough town, that definition gets you to the narrow argument I described above anyway. The complaint pointed to the example of Gunnison, Colorado, where City Market (Kroger) and Safeway (Albertsons) are the only supermarkets in town. Merge the two and a Gunnison shopper who wants to buy groceries from a supermarket other than Kroger is looking at a drive of roughly 65 miles. For that shopper, a Costco membership or grocery delivery is not a realistic substitute.
But I am not sure I believe the strong version of Weiser’s complaint, and part of the reason gets back to what the relevant market is. A quick search for “grocery store” in Gunnison on Google Maps returns several results in addition to the City Market and Safeway listed in the complaint. This includes a Walmart and a couple stores that would fall into the “health food” store category. The Walmart is not a supercenter so it does not have all the groceries a supermarket would have (fresh meat, produce, dairy, etc.) but does have some food (the complaint does point out the fact that this isn’t a supercenter in a footnote). And the health food stores may already have higher prices along with more limited selection than the two main supermarkets. But it’s not obvious that these stores should be completely ignored as relevant competitors.
Suppose the merger had gone through, City Market and Safeway are now run by the same company. It’s not clear this translates to immediate market power given the other options, and it might create downward pressure on prices. Greater scale could allow the merged chain to lower operating costs and pass some of this on to consumers, which would also put pressure on the other grocery stores in the area to do the same. This is not guaranteed but certainly a possibility once we expand the relevant market to include the non-supermarket stores in the area.
Switching with more options
This could be taken even further once we move outside the example of a place like Gunnison. Large grocery chains like Kroger and Albertsons do not only compete with other supermarkets. Shoppers today also buy groceries from warehouse clubs like Costco, discounters like Aldi, and online grocery delivery services like Amazon Fresh. None of which counted in the complaint’s definition of the relevant market. The economic question is not whether some shoppers treat these stores as substitutes. We can assume some likely will. The question is whether enough shoppers would switch at the margin to make a price increase unprofitable. The shopper the narrow definition is built around is the one doing a single big weekly run at King Soopers who would keep doing it even after prices rose.
Economists who opposed the challenge to the merger made a version of this point with survey data. They showed that most households now split their grocery shopping across more than one store in a given week, and supermarkets’ share of retail food sales has fallen steadily as supercenters and club stores take a bigger cut.
Even with these options some shoppers may not substitute though. If the pricing power were there, there is some price increase for which switching is not worth it. Consumers keep going and eat the cost. But switching does occur, especially when the entire basket of groceries increases in price. And stores do not compete only on price but also on the products they carry. If I can get roughly the same selection of goods at both a King Soopers store and Walmart, then the decision comes down to price differences. But if King Soopers offers products I can’t get at Walmart, then that added benefit may keep me shopping there despite higher prices.
A merger between two large chains might also enhance their ability to compete on this margin so that prices and quality both increase. In that case, it is a bit harder to determine whether consumers are made worse off. If they are getting more out of shopping at the new merged King Soopers, those benefits are offsetting some of the price increases. Now figuring out whether consumers are worse off depends on being able to measure both price increases (relatively easy) and differences in the basket of goods consumers can get across options including along the margin of quality (relatively difficult).
The substitution point is focused on whether we should expect prices to rise after the merger. But we can also ask, if prices do rise, how high should we expect them to? As before, this depends on how relevant competitors are defined. And that definition may go beyond grocery stores and similar stores mentioned above. We don’t typically think of restaurants as direct substitutes for food bought at a grocery store but as prices rise, food away from home becomes a more relevant substitute. That doesn’t mean the existence of a McDonald’s makes it so prices stay where they were before the merger. But it places some ceiling on how high those prices can go. If you can feed your family for much less by going to McDonald’s than purchasing ingredients at the grocery store, more people switch to McDonald’s (I’m ignoring considerations about health people might make in this situation to make the point).
I don’t want to dismiss Weiser’s argument completely. There is a degree of arbitrariness to defining any relevant market. As Brian Albrecht puts it, a market is a construct in the economist’s head for thinking through a problem, and where you draw it depends on the question you are asking. The fact that I buy the argument that Kroger and Albertsons do in fact compete with Costco and Aldi (or the health food stores in Gunnison) does not mean the narrower definition has no merit. And to the complaint’s credit, it did not bet everything on its boundary. It reran its concentration numbers with club stores and dollar stores counted in, and the merger still crossed the presumptive-illegality line in all 39 Colorado city areas the complaint examined. But part of my point here is that concentration on its own can’t tell us what would have happened if the merger had gone through.
Conclusion
Ultimately, the merger I’m talking about failed and is old news. Which brings me back to Aldi moving forward with its Colorado openings. Aldi is known for low prices. Maybe Aldi would have stayed out had the merger gone through, but that seems unlikely. What I find interesting is that Aldi is exactly the kind of store Weiser’s narrow market definition excluded. According to the narrow definition, Aldi won’t do anything to discipline supermarket prices. But I think entry like this is consistent with the broader view of the market even if not proof of it.