Analysis of threshold cointegration with asymmetric adjustments in the Hong Kong grocery industry

High market concentration in the Hong Kong grocery industry has been prevalent over many years with the domination of a few large supermarket chains. However, no research has been conducted on the price dynamics between the supermarket and non-supermarket sectors to investigate whether the non-supermarket sector can impose competitive discipline on the dominating supermarket chains. We argue that standard cointegration tests cannot allow for transaction costs and distinguish whether the price co-movement is attributable to price competition or collusion. Our study therefore fills this research gap by adopting the threshold cointegration tests in a three-regime threshold vector error-correction model to account for the asymmetric price adjustment dynamics between supermarket and non-supermarket sectors of Hong Kong and evaluate the market power of the supermarket sectors in the presence of transaction costs. Our results favour the presence of cointegration between the supermarket and non-supermarket price indices with asymmetric adjustment dynamics. We interpret the results of statistically significant downward price adjustments in the outer-band regimes as the evidence of mutual price competition. Nevertheless, the supermarket sector has stronger market power than the non-supermarket sector, and therefore can sustain higher price level without inducing substantial competition pressures inside the neutral band.