Research project: Nonlinear Cointegration and Relevant Market Definition: A Study of Grocery Markets


This project is supported under the Faculty Development Scheme (FDS) of the Research Grants Council (RGC).

Principal Investigator: Dr LEE Shu Kam, Associate Professor, Department of Economics and Finance

Co-Investigators: Dr. Woo Kai Yin, Associate Professor, Department of Economics and Finance; Dr. SHUM, Kwok Ching Paul, former Assistant Professor, Department of Economics and Finance

Amount awarded: HK$385,940

Duration of the project: January 2015 – December 2016


The grocery industry in Hong Kong has increased its concentration over the past thirty years. It is generally believed that high concentration may give rise to market power, which in turn causes anti-competitive behavior. However, based on the theory of contestable markets, high concentration may not necessarily result in excessive market power.

Instead, using cointegration test, we may test whether the selling prices of various suppliers move synchronously and converge. If yes, the suppliers/firms are under competition from each other and we may say that the relevant market is defined. Indeed, some competition authorities in foreign countries have recognised the usefulness of cointegration test for relevant market definition and used the test results to support policy and court decisions.

However, the cointegration tests previously adopted by the anti-competition research do not consider transaction costs. The existence of these transaction costs are important because if the potential gain from price differentials of similar products does not outweigh the transaction costs, the arbitrage process to equalise the product prices will not take place even the market is really competitive and hence the testing results may draw mistaken conclusion.

To overcome this weakness, our research project will therefore use nonlinear price-based cointegration tests for Relevant Market Definition.

Source: May Issue 2015

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