Abstract

Retail consolidation, technological change in production and marketing, and growing

consumer demand for produce have altered the traditional market relationships between

producers, wholesalers, and retailers. Increasingly, produce suppliers are asked to provide additional marketing services and incentives in exchange for volume purchases and

other commitments by buyers. This report synthesizes the results from a multiphase project that examined the dynamics of produce marketing, the produce shipper-retailer relationship, and how changes in the produce market affect the relative market influence of

producers, retailers, and consumers. 

Keywords: Fresh fruits and vegetables, fresh produce, fresh produce marketing channels, supermarket, market power, competition, trading practices.

Acknowledgments

Acknowledgments: The authors thank Mark Denbaly, Munisamy Gopinath, Barry

Krissoff, James MacDonald, Paul Patterson, Jeff Perloff, Daniel Pick, Timothy Richards,

and Richard Sexton for helpful comments and reviews. We thank Richard Sexton,

Mingxia Zhang, James Chalfant, Timothy Richards, and Paul Patterson for their econometric analyses of market power for selected fresh produce items, and for their reviews

of the literature, which we adapted for use in this report. We appreciate the assistance

Michael LeBlanc and Mary Bohman provided in improving the presentation of the

report. Finally we thank Dale Simms for editorial assistance.

United States

Department

of Agriculture

www.ers.usda.gov

Electronic Report from the Economic Research Service

September

2003

Agricultural

Economic

Report 

Number 825

U.S. Fresh Produce Markets

Marketing Channels, Trade Practices,

and Retail Pricing Behavior

Carolyn Dimitri, Abebayehu Tegene 

and Phil R. Kaufman
Contents

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Today’s Produce Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

New Relationships Between Retailers and Shippers: Trade Practices . . . . . . . . . . . . . . . . . . 10

Nonprice Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Retailer Pricing Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Retailer Market Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Retailer Market Power: New Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Perishable Fresh Produce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Semi-Perishable Fresh Produce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

2  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA
Summary

By all accounts, marketing fresh fruits and vegetables

has been transformed. First, consumer demand has

increased for greater variety and quality in fresh produce. Second, supermarkets have merged, acquired

new stores, and grown larger. Third, anecdotal evidence suggests that the role of merchant wholesalers in

produce has become less important while that of the

foodservice sector has increased. And fourth, nonprice

provisions such as marketing fees have grown increasingly common in transactions between retailers and

grower-shippers.

ERS’s study of the produce industry aimed to answer

several questions. What is the current state of the produce industry? How do produce shippers and retailers

conduct business? And is the increased use of different

types of marketing fees the result of growing retailer

influence or business efficiencies? 

The scarcity of public data led ERS to use a threepronged approach. 

• ERS collaborated with Cornell University, and

exhausted the public domain for data describing the

fresh produce industry; these results are published in

the ERS report, Understanding the Dynamics of

Produce Markets: Consumption and Consolidation

Grow, August 2000.

• Because data on transactions between shippers and

retailers are scarce, ERS—in collaboration with the

University of California, Davis; University of

Arizona, and University of Florida—conducted

interviews of shippers, retailers, and wholesalers for

information on marketing of grapes, oranges, grapefruit, tomatoes, lettuce, and bagged salad. While the

small number of interviews warrant caution in interpreting the findings, the research enhances understanding of recent changes in produce marketing.

Results from this portion of the project are published in U.S. Fresh Fruit and Vegetable Marketing:

Emerging Trade Practices, Trends, and Issues,

January 2001.

• ERS contracted studies with university researchers

to assess the pricing by retailers for some fresh produce commodities in selected markets. Timothy

Richards and Paul Patterson (Arizona State

University) investigated supermarket retailer behavior in the selling and buying of Washington apples,

California oranges, California grapes, and Florida

grapefruits in Competition in Fresh Produce

Markets: An Empirical Analysis of Channel

Performance, published by ERS in September 2003.

Richard Sexton, Mingxia Zhang, and James

Chalfant (University of California, Davis) examined

the market for California and Arizona iceberg lettuce, packaged salads, and Florida and California

tomatoes in Grocery Retailer Behavior in the

Procurement and Sale of Perishable Fresh Produce

Commodities, published by ERS in September 2003.

U.S. produce markets have evolved considerably since

the 1980s. Per capita consumption of fresh fruits and

vegetables increased 6 percent between 1987 and

1995, and 8 percent between 1995 and 2000. New

products were introduced to meet burgeoning consumer demand, and as a result, the average produce

department is larger. The marketing channels have

changed also. The share of produce volume sold

directly by grower-shippers to retail supermarkets has

increased, as have sales to the foodservice sector. 

Mass merchandisers, emphasizing everyday-low-price

strategies, have provided new competition for supermarkets. In response, large supermarket retailers have

emphasized customer service while pursuing efficiency

gains and lower capital investment costs. Many of

them have merged or acquired other chains, citing the

potential for lower costs through streamlined operations, volume discounts in buying, and exclusive partner relationships. Consolidation through mergers and

acquisitions by grocery retailers has produced a significant increase in the share of total U.S. grocery store

sales by the largest firms. 

Coincident with these changes were new provisions in

retailer-shipper transactions. Most controversial is the

“slotting fee,” where suppliers pay a lump sum to

retailers for introducing their new products to the

supermarket shelves. The use of fees and services is

controversial. Some argue that they are a manifestation

of retailers’ market power over shippers, while others

suggest the various fee and service requests have efficiency-based motives. Because both points of view are

valid, empirical evidence is needed to provide greater

insight into the factors underlying fees and retail consolidation. To date, no comprehensive empirical studies have examined these issues, largely because transaction data are proprietary. Thus, the issue remains

unresolved.

Economic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  3
To assess emerging practices in the produce sector,

such as retailers’ requests that shippers pay slotting

fees or provide services like customized containers, it

helps to understand the importance of retailer market

power. If they possess little or no market power, then

fee and service requests must be driven by efficiency

concerns, in which case policy response is inappropriate. If market power exists, fees and services may be a

symptom of that market power, but the appropriate

policy remedies may not focus on disallowing use of

such fees and services so much as the exertion of market power itself. If retailers hold market power over

grower-shippers or consumers, banning the use of particular fees and/or services may simply cause that

power to be manifested elsewhere, such as in lower

acquisition prices, and perhaps at the cost of reduced

efficiency. 

Econometric analysis indicated that retailers do influence prices paid to fresh produce shippers and by consumers for some commodities. Retailer ability to hold

shipper prices below competitive prices was evident for

grapefruit, apples, and lettuce, but not for tomatoes,

grapes, and oranges. Consumer prices in excess of

purely competitive prices were evident for apples,

oranges, grapefruit, fresh grapes, tomatoes, and lettuce. 

ERS’ multiphase project has provided a deeper understanding of the relationship between retailers and shippers, ranging from the form of the transaction to the

degree of retailers’ influence over prices paid to shippers for some products. Despite these advances, several important questions remain. Specifically, does the

presence of market power engender new trends in marketing, such as direct buying from grower-shippers,

supply chain management, and fees and services? Or

are they the outcome of efforts to gain distribution efficiencies? Making that determination requires additional research. 

4  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA
Introduction

The fresh produce market has changed markedly over

the last 15 years. Shifts in consumer demand, technological change in production and marketing, and retail

consolidation have altered the traditional market relationships between producers, wholesalers, and retailers. Consumers are eating more fresh produce, purchasing a wider variety year-round, and demanding

more convenience, like bagged salads. Information

technology has introduced efficiencies throughout the

supply chain, reducing production and marketing

costs. Retail consolidation has occurred rapidly as

large supermarket firms have merged or been acquired.

Mass merchandisers and warehouse club retailers are

selling an increasing volume of food products with

low-price strategies. Fresh fruits and vegetables sold to

restaurants, fast-food outlets, and other foodservice

operators have grown to account for more than half of

all retail produce sales. 

Against this backdrop of changing supply and demand

relations, fresh produce suppliers for supermarkets and

mass merchandisers are being asked to provide additional marketing services and incentives in exchange

for volume purchases and other commitments by buyers. The demand for such fees and services coincides

with new modes of supermarket retailer operation. 

To assess emerging practices in the produce sector,

such as retailers’ requests that shippers pay slotting

fees or provide various services, it helps to understand

the importance of retailer market power. If they possess little or no market power, then fee and service

requests must be driven by efficiency concerns, in

which case policy response is inappropriate. If market

power exists, fees and services may be a symptom of

that market power, but the appropriate policy remedies

may not focus on disallowing use of such fees and services. Rather, the focus of policy should be on the

exertion of market power itself. If retailers hold market

power over grower-shippers or consumers, banning the

use of particular fees and/or services may simply cause

that power to be manifested elsewhere, such as in

lower acquisition prices, and perhaps at the cost of

reduced efficiency. 

To put the changing relationship between produce suppliers and supermarket retailers in perspective, ERS, at

the request of the Secretary of Agriculture, conducted

a multiphase project, the results of which are summarized in this report. The overall project had three major

objectives:

• Develop a comprehensive overview of the produce

industry from grower-shipper to retailer, including

consumption and retail sales trends, markets and

marketing channels, and the changing structure of

produce buyers.

• Identify and characterize the types of trade practices

used in the produce industry, including fees and services provided by shippers, contracts, and other

marketing strategies.

• Analyze shipper-to-retailer and retailer-to-consumer

pricing behavior to assess the relative influence of

retailers, grower-shippers, and consumers in the

market for fresh produce.

The project focused on several homogeneous fresh

produce items: California grapes, California oranges,

California vine-ripe tomatoes, Florida and California

mature-green tomatoes, Florida grapefruit, California

and Arizona lettuce, bagged salads, and Washington

apples.1 These products were selected for their importance as a share of total production volume or share of

retail sales. In terms of farm value, leading fruit products are grapes, oranges, and apples. (In terms of volume, apples, oranges, grapefruit, and grapes are the

top fruit products.) The fruits with the highest value at

the retail level in 1997 were apples, oranges, and

strawberries. In terms of farm value, leading vegetable

products were potatoes, tomatoes, and lettuce. At the

retail level, the top three vegetables in 1997 were lettuce, tomatoes, and potatoes.

All of the issues summarized here are examined in

detail in several companion publications (see box). 

Economic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  5

1Apples are included in the examination of retail pricing behavior only, while both trade practices and retail pricing behavior are

explored for oranges, grapefruit, grapes, tomatoes, and lettuce.
6  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA

The Project’s Publications

ERS collaborated with Geoffrey M. Green, Edward W. McLaughlin, and Kristen Park, from Cornell

University, to develop a comprehensive overview of the produce industry, including changes in consumption, retail sales, and marketing channels. The research relied on public data to document changes in produce markets from 1987 to 1997 in the United States, and identified consumer, retailer, wholesaler, and

supplier forces acting on market channels. The results of this research were published in the ERS report,

Understanding the Dynamics of Produce Markets: Consumption and Consolidation Grow, published by

ERS in August 2000.

ERS collaborated with researchers from the University of California (Roberta Cook-Canela), University of

Arizona (Gary Thompson), and University of Florida (Suzanne Thornsbury). The results of this effort were

published as U.S. Fresh Fruit and Vegetable Marketing: Emerging Trade Practices, Trends, and Issues,

published by ERS in January 2001. In this report, ERS relied on in-person discussions with shippers,

wholesalers, and retailers to provide a rich description of current marketing practices, covering sales channels, types of sales, and fees (including the widely discussed slotting fee) and services that are frequently

part of transactions.

Timothy Richards and Paul Patterson (Arizona State University) investigated supermarket retailer behavior

in the selling and buying of Washington apples, California oranges, California grapes, and Florida grapefruits in Competition in Fresh Produce Markets: An Empirical Analysis of Channel Performance, published

by ERS in August 2003. Richard Sexton, Mingxia Zhang, and James Chalfant (University of California,

Davis) examined the market for California and Arizona iceberg lettuce, packaged salads, and Florida and

California tomatoes in Grocery Retailer Behavior in the Procurement and Sale of Perishable Fresh

Produce Commodities, published by ERS in August 2003.
Today’s Produce Industry2

Fresh fruit and vegetable products move quickly

through the marketing system to combat spoilage.

After harvest, fresh produce is handled and packed

either by a shipper or grower-shipper. Produce grown

in the United States may be exported, or sold direct to

consumers, retail stores, or foodservice establishments.

Sales from grower-shippers to retailers and foodservice

establishments might be mediated by wholesalers or

brokers, or might occur directly. 

These marketing channels have undergone considerable change since the late 1980s. Prior to 1987, fresh

fruit and vegetable markets were more fragmented;

most transactions took place between produce growershippers and wholesalers on a day-to-day basis, based

on fluctuating market prices and quality levels. Today,

a typical produce sale may take place between a multiproduct grower-shipper and a large supermarket retailer under a standing agreement or contract specifying

various conditions and terms, including marketing services provided by the grower-shipper, volume discounts, and other price adjustments and quality specifications. Changes in these marketing services coincided

with the growth of value-added and consumer-branded

products, increasing variety, consolidation of food

wholesalers and retailers, the expansion of the foodservice sector, and the greater role of produce imports

and year-round supply.

In 1997, $1.1 billion worth of produce was sold directly to the consumer, $34.3 billion in retail stores, and

$35.4 billion through foodservice establishments (fig.

1). While the dollar amount of produce moving

through specialized produce wholesalers increased

from $20 billion in 1987 to $33 billion in 1997, the

share of produce wholesaler sales to retailers declined

—from 38.1 percent to 34.6 percent (fig. 2). Large

retail stores have increased the volume of direct purchases, bypassing produce wholesalers. At the same

time, wholesalers dramatically increased their share of

produce sales to the foodservice channel—from 8.4

percent of sales in 1987 to 21.2 percent of sales in

1997. This threefold increase occurred as consumers

devoted more of their food dollar to restaurants, fastfood outlets, schools, and other foodservice outlets.

Americans are spending more on fresh produce, and in

addition to buying a greater quantity of produce, they

are buying new value-added products. Per capita consumption of fresh fruits and vegetables increased 6 perEconomic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  7

Figure 1

Fresh fruit and vegetable marketing channels 1987 and 1997

Exports

1987- $1.2 

1997- $3.1 

Brokers

Grower/shippers

Direct markets

Retail stores

Foodservice

establishments

Consumers

Imports

General-line 

grocery wholesalers

Specialized produce

wholesalers

General-line foodservice wholesalers

1987 - $3.6

1997 - $6.4

1987 - $20.0

1997 - $33.0

1987 - $3.8

1997 - $7.1

1987 - $2.0

1997 - $4.1 1987 - $7.0

1997 - $6.9

1987 - $12.0

1997 - $35.4

1987 - $22.0

1997 - $34.3

1987 - $0.6

1997 - $1.1

1987 - $34.6

1997 - $70.8

Note: All values are in $ billion.

Sources: Census of Wholesale Trade Census of Retail Trade; Blue Book, 1997; McLaughlin et al., 1998.

1987 - $11.2

1997 - $17.8

2For additional information on the material in this section, see

Kaufman et al., 2000.
cent between 1987 and 1995, and 8 percent between

1995 and 2000 (table 1). As consumption has increased,

so has the demand for variety, convenience, and quality,

as evidenced by the explosion in produce department

offerings (fig. 3). Many products (for example, lettuce

and tomatoes) are available year-round, produce is precut, and more packaged and branded products are available. The share of branded produce increased from 7

percent in 1987 to 19 percent in 1997, while fresh-cut

produce and packaged salads rose from 1 percent to 15

percent of total sales (fig. 4).

Supermarkets, including supercenters,3 accounted for

the largest share (91.5 percent) of produce sales in

foodstores in 1997, amounting to $30.2 billion.

Produce sales by supermarkets and supercenters

totaled almost 43 percent of total retail produce sales

by foodstores and foodservice establishments

(Kaufman et al., 2000). For this reason, supermarket

developments have considerable impact on wholesalers, grower-shippers, and other intermediaries.

Economic forces—from both consumers and competitors—have been changing the environment in which

supermarkets compete. The share of income spent for

food-at-home purchases continues to fall. Consumers

spent almost 47 percent of their food dollars in the

foodservice/restaurant sector in 2000, compared with

44.7 percent in 1987 and 46.6 percent in 1997 (ERS,

2003). 

8  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA

Table 1—U.S. consumption of fresh fruits and 

vegetables

Pounds of Consumption Per Capita

1987 1995 2000

Fresh fruits 121 125 130

Fresh vegetables 162 177 196

Total 283 301 326

Source: USDA, Fruit and Tree Nuts Situation and Outlook Yearbook,

2000, and Vegetables and Specialties Situation and Outlook

Yearbook, 2000.

3A supercenter is a large combination supermarket and discount

general merchandise store, with grocery products accounting for

up to 40 percent of selling area.

Figure 3

The variety of fresh produce items carried by 

retailers has increased

Source: Supermarket Business, October 1999.

Number of items

0

50

100

150

200

250

300

350

1987 1997

173

345

Figure 4

Branded and packaged items account for a growing 

share of produce sales

Source: P. Kaufman, et. al. “Understanding the Dynamics of 

Produce Markets,” USDA-ERS (AIB-758).

Branded item share Fresh-cut and packaged

salad share

0

2

4

6

8

10

12

14

16

18

20

1987 1997

Percent of produce 

dept. sales

7

19

15

1

Figure 2

Produce wholesalers sales

Wholesale Retail Foodservice Exports Other

0

5

10

15

20

25

30

35

40

45

50 1987 1997

Produce wholesaler sales to retailers declined while

sales to food service increased

Source: Census of Wholesale Trade, 1987 and 1997.

46.5

33.0

38.1

34.6

8.4

21.2

4.1 5.6

2.8

5.7
In addition, rapid expansion of retail food sales by

mass merchandise and warehouse club stores has provided additional competition; they captured 8.5 percent

of total retail food sales in 2000, up from 2.4 percent

in 1987 and 6.8 percent in 1997. Meanwhile, the share

of food sales by supermarkets fell from 63.7 percent to

57.8 percent over 1987-2000.

Mass merchandisers such as Wal-Mart, Kmart, and

Target have emphasized everyday-low-price strategies

to achieve rapid growth in food sales. They have also

introduced innovations in the procurement and distribution of the products they sell to gain efficiencies and

lower costs (Kinsey 2000; Supermarket News, 2002a,

2002b). They customarily purchase large volumes of

produce to obtain the lowest prices from suppliers. 

Some mass merchandisers, such as Wal-Mart, do not

accept fees as part of their transactions. Instead, WalMart provides suppliers with real-time store sales data

to support distribution, inventory management, and

instore promotion activities (Kinsey, 2000). Wal-Mart

also introduced a standardized returnable (to the supplier) plastic container that is used both for distributing

fresh fruit and vegetable products to their stores and

for instore product display. The Wal-Mart model

emphasizes cooperation and coordination of activities

in the supply chain between suppliers and buyers, with

the goal of reducing systemwide costs. Many features

of the so-called “Wal-Mart model” were incorporated

in the supermarket industry initiative known as

Efficient Consumer Response (ECR), introduced in

1992. 

Large supermarket retailers have sought efficiency

gains, in the form of lower labor and capital costs,

product differentiation, and improved consumer services (Wall Street Journal, 1998). 

Many supermarket retailers have merged or expanded

through acquisitions, citing the potential for lower

costs as an incentive for becoming larger (Kroger Co.,

2000; Safeway, 2001; Food Institute Digest, 2000).

Consolidating retailers have cited potential cost savings through streamlining of product distribution functions (Wall Street Journal, The Packer, company press

releases). Large retailers typically perform wholesaling

activities such as purchasing goods from suppliers,

arranging for shipment to distribution warehouses, and

replenishing store-level inventory. 

Supply-chain management practices such as continuous inventory replenishment, the use of cross-docking

facilities, direct store delivery by suppliers, and selective use of specialty wholesalers can reduce the need

for large distribution centers and their associated costs.

The number of distribution centers can be reduced,

while remaining warehouses can be used more efficiently. Supply chain initiatives have also spurred the

greater use of forward contracting arrangements that

set fixed prices for suppliers. 

To achieve these efficiencies, retailers are consolidating, as evidenced by a significant increase in the share

of total U.S. grocery store sales by the largest firms

(fig. 5). By 2000, the share of the 20 largest retailers

had reached 52.0 percent of total grocery sales, up

from 36.5 percent in 1987. While retail concentration

at the national level has increased, concentration at the

local level has not changed significantly. This is

important because local concentration may influence

the degree of retailer control over consumer prices.

Economic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  9

Figure 5

U.S. grocery store concentration, 1987-20001

Percent of U.S. 

grocery store sales

0

10

20

30

40

50

60

Top 4

Top 8

Top 20

1

Includes grocery sales of Wal-Mart supercenters but no other mass 

merchandisers.

Sources: Monthly Retail Trade Survey, Census Bureau; Company 

annual reports.

1987 92 94 96 98 2000 93 95 97 99
New Relationships Between

Retailers and Shippers: 

Trade Practices

Retailer-shipper agreements center on quantity and

price considerations. Increasingly, however, retailershipper transactions include off-invoice marketing and

trade practices. “Trade practices” cover both fees (such

as volume discounts and slotting fees) and services

(like automatic inventory replenishment, special packaging, and requirements for third-party food safety

certification.) The term also refers to the overall structure of a transaction—for example, long-term relationships or contracts versus daily sales with no continuing

commitment. The specific provisions of transactions

between buyers and sellers are, by their nature, proprietary. Little public information is available, except for

anecdotal information reported in trade publications.

There are differences in opinion about the growing use

of fees and services in marketing produce. Shippers

argue that mergers have given retailers market power

over them, citing fees and services as evidence. These

fees, they argue, undercut competition and reduce consumer welfare by reducing output, increasing prices, or

slowing product innovation. Retailers counter that the

explosion in new products exerts enormous pressure on

a limited amount of shelf space, and fees serve to efficiently allocate that space. Thus, increases in fees reflect

the increasing cost of retailing (Bloom et al., 2000). 

To better understand trade practices, ERS and its cooperators conducted personal interviews with shippers,

supermarket retailers, and wholesalers.4 The interviews

focused on the following products: California grapes,

California oranges, Florida and California maturegreen tomatoes, California vine-ripe tomatoes, Florida

grapefruit, and California/Arizona lettuce (head, leaf,

and romaine) and bagged salads. Shippers, retailers,

and wholesalers answered questions about contracts,

fees, marketing services, pricing, number of accounts,

and length of accounts for the years 1994 and 1999. 

Seventy-four personal interviews were conducted: 57

with shippers and 17 with retailers and wholesalers

(table 2). Proportional random sampling was used to

select the shippers interviewed, with medium and large

firms given more weight in the sample selection

process than small. (Small shippers sell very little to

retailers, the focus of the study.) Retailers (supermarkets) and wholesalers were both large and midsized,

and covered different regions. 

Interview results suggest that the structure of the shipping industry varies greatly according to product. For

example, in 1999 there were 149 California grape

shippers, with none accounting for over 6 percent of

total industry sales. At the other extreme, there were

only 25 California tomato shippers, down from 31 in

1996. While there were 54 bagged salad firms selling

to retailers (down from 63 in 1994), the top two firms

accounted for 76 percent of total fresh-cut salad sales

in supermarkets. Hence, for a few fresh produce items,

concentration of sales at the shipper level has surpassed that of retailers, even though the sales of these

firms may still be small relative to those of the large

retail chains.

The wave of retail consolidation in the late 1990s

raised the question of whether newly formed companies were merging their buying operations. If they

were, shippers might have fewer supermarket customers since each buyer would be purchasing for a

larger number of stores, which might increase the

negotiating power of buyers relative to shippers. 

When asked about the number of customers (supermarket, foodservice, and mass merchandisers), shippers reported small changes in the number of regular

customers. Although some shippers reported a

decrease in the total number of customers, roughly as

many reported an increase. Some shippers were selling

to fewer but larger retail accounts, and others were

replacing retail accounts with other types, such as

foodservice buyers. 

Supermarket retailers report similar findings: between

1994 and 1999, retailers reported that the number of

their produce buyers remained fairly constant at the

corporate and division levels, although 18 percent

reported a decline in field buyers. The ultimate impact

on shippers of fewer supermarket field buyers is likely

offset by the increase in purchases by foodservice buyers and mass merchandisers. 

Although the total number of produce buyers of all

types may not have changed much for most shippers

between 1994 and 1999, the importance of the largest

buyers has increased (table 3). The top four buyers

accounted for 22 to 45 percent of sales in 1999,

depending on the product. The largest increase (11

10  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA

4Results from these interviews are reported in greater depth in

Calvin et al.
percent) in this share was for Florida tomato shippers.

Retail buyers, on the other hand, reported their top

four suppliers provided from 85 to 97 percent of total

purchases, depending on the product, in 1999 (fig. 6).

Nonprice Provisions 

Traditionally, the fresh produce industry has been

characterized by daily sales transactions. For grapes,

oranges, grapefruit, and tomatoes, daily sales remain

the most important sales mechanism across all types of

buyers. However, the share of daily transactions to

total transactions declined from 72 percent in 1994 to

58 percent in 1999. The use of advance pricing

arrangements for promotions increased from 19 to 24

percent over the same time period, and the number of

weeks in advance for which prices are fixed appears to

have grown as well. 

The use of contracts has also become more common.

In 1999, short-term contracts accounted for 11 percent

of total commodity sales (grapes, oranges, grapefruit,

and tomatoes), and long-term (annual or multiyear)

contracts 7 percent. Lettuce sales mechanisms in 1999

were similar to those of other commodities, except that

all contracts were long term. Bagged salad shippers

indicated that annual or multiyear contracts are the

standard for retail sales.

Since the inception of supermarkets when retailers

requested free samples of products, nonprice provisions have been part of the retailer-shipper transaction.

Since then, new kinds of provisions have been introEconomic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  11

Table 2—Number of firms interviewed, total number of shippers, and share of State production

Type of firm Firms interviewed Shippers in State Share of 1999 State production1

Number Percent

Shippers

California fresh grape 9 149 19

California orange 9 39 38

Florida grapefruit 8 110 54

California tomato 8 25 56

California tomato (repackers) 2 n.a. n.a.

Florida tomato 6 65 32

California/Arizona lettuce2 8 n.a. n.a.

California/Arizona bagged salad3 7 54 n.a.

Retailers and wholesalers

National retailers 8 n.a. n.a.

Regional retailers 6 n.a. n.a.

Wholesalers 3 n.a. n.a.

Notes: n.a.= Not available or not applicable.

1Imports and production from other States handled by these shippers were excluded in determining the sample share of State production. 2Lettuce includes head, leaf, and romaine.

3Number of firms selling bagged salads nationally to mainstream supermarkets is used as a proxy for the number of California/Arizona shippers.

Sources: Calvin et al., 2001.

Table 3—Share of total shipper sales going to top 4 and top 10 buyers, 1994 and 19991

California California Florida California Florida CA&AZ

grapes oranges grapefruit tomatoes tomatoes lettuce

Top 4 buyers: Percent of sales

1994 29 28 26 26 34 21

1999 31 34 29 28 45 22

Top 10 buyers:

1994 47 46 54 45 48 37

1999 49 52 51 48 59 39

1Results are based on a limited number of observations and must be interpreted with caution.

Source: Economic Research Service, Produce Marketing Study interviews, 1999-2000.
duced. Shipper and retailer interviews provided insight

into the frequency and magnitudes of the provisions.

Most shippers and retailers reported that the incidence

and magnitude of fees and services associated with

transactions had increased between 1994 and 1999.

Fees paid to retailers are usually around 1 percent of

sales for grapes, oranges, grapefruit, and tomatoes, and

range from 1 to 8 percent for bagged salads. Overall,

48 percent of the types of fees requested were new in

the last 5 years (1994-99). 

Forty-one percent of firms reported they had lost

accounts when they did not comply with a fee request

from retail or mass-merchandise buyers. The most frequently paid type of fee is the volume discount, a trade

practice that has been used for years, although shippers agree that the incidence and magnitude of this fee

has increased. Volume incentives can promote a more

stable relationship between suppliers and retailers; as

the retailer buys more units from the supplier, costs per

unit decline, providing an incentive for the retailer to

buy larger quantities (over the season) from a particular supplier. Shippers and retailers may both gain efficiencies in marketing by increasing the size of

accounts. 

Slotting fees have long been used in the supermarket

for dry grocery items, and recently entered the fresh

produce department. Slotting fees are common for

fresh-cut produce and may be either requested by

retailers or offered by shippers. Bagged-salad shippers

reported that shippers, not retailers, first introduced

slotting fees to this industry in an attempt to buy market share from their competition; they also reported

that the fees began before the last wave of retail consolidation. Slotting fees were reported to range from

$10,000 to $20,000 for small retail accounts to

$500,000 for a division of a multiregional chain, and

up to $2 million to acquire the entire business of a

large multiregional chain. None of the grape, orange,

grapefruit, and tomato shippers reported paying slotting fees as defined in our study. 

Requests for marketing services from produce shippers

have increased, with 77 percent of requests reported as

new between 1994 and 1999 (see box “Select Services

Requested”). Overall, shippers reported having lost 21

percent of accounts for noncompliance with a service

request. Shippers believe they receive more benefits

from providing services than from paying fees, as they

may obtain advantages relative to competitors. This

likely explains their higher compliance with services

than fees. According to shippers, the most common

service requested is third-party food safety certification, followed by returnable plastic containers. 

Retailer interviews indicate that 9 out of 10 retailers

requested more services from their suppliers in 1999

than in 1994. On average, retailers report requesting

5.5 different services from suppliers. The top three ser12  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA

Figure 6

Share of produce purchased by retailers from their top four suppliers in 1999

Percent 

Source: Economic Research Service, Produce Marketing Study interviews, 1999-2000.

78

80

82

84

86

88

90

92

94

96

98

Bagged salads Tomatoes Avg. all products Oranges Grapefruit Lettuce Grapes
vices requested (as reported by retailers) are privatelabel produce items, category management, and electronic data interchange. More than half of retailers

asked for special transportation arrangements (such as

discounts on transportation for large volume sales),

new types of packaging, and third-party food safety

certification. 

Interviews with shippers and retailers indicate that

their relationship is changing. But are increased fees

and services the result of retailer market power over

shippers? Or has the trading relationship changed

because of increased consumer demand, technological

innovations in marketing/retailing fresh produce, and

growth in foodservice firms and mass merchandisers?

An important first step in addressing these questions is

to examine retailer pricing behavior.

Economic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  13

Select Services Requested

Third-party food certification. Third-party food certifiers examine suppliers for compliance with microbial

quality control processes, pesticide application, and pesticide residue regulations.

Returnable containers/pallets. Recyclable plastic cartons and standardized pallets may help to streamline handling at the distribution and retail levels.

Electronic data interchange. Electronic interchanges between specific retailers and their preferred suppliers are used for invoicing, electronic ordering, and other procurement activities.

Provision of private labels. Private-label products (also known as “house brands”) bear the name of the

retail outlet where they are sold (such as Safeway or Stop & Shop). Suppliers and retailers can lower costs

and increase gross margins by selling private-label products.

Automatic inventory replenishment. The supplier is electronically integrated into the buyer’s inventory

management system. The preferred supplier has responsibility for and access to the data necessary to comanage the inventory with the retailer.

Category management. Retailers who use category management (merchandising of product groupings

based on actual consumer purchasing patterns) analyze detailed sales data to create an optimal product

mix, usually with the help of a manufacturer from within that category.
Retailer Pricing Behavior 

Analyzing retailer pricing behavior requires a skillful

blend of data analysis, economic modeling, and institutional understanding. When asking if retailers exercise market power, one is asking if retailers are able to

influence prices away from the perfectly competitive

level (see box, “Market Competitiveness”). In short,

consumers would be paying prices in excess of those

that would have prevailed under perfect competition,

and retail suppliers would be receiving prices below

those in a competitive market. 

14  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA

Market Competitiveness

Researchers use the perfectly competitive market as a benchmark for assessing the degree of firm market

power. In this competitive market, price equals marginal production cost for each firm in the market. Thus,

researchers typically try to measure the gap between prices and marginal cost when estimating the presence and the degree of firm market power. In industries where sellers have market power, firms charge

consumers prices above marginal cost, while market power in buying is the ability to set prices paid to

suppliers below marginal cost.

In a monopolistic market, one firm has complete control over setting the selling price. Industries with few

firms (oligopolies) have some, but not total, market power, and thus the gap between price and marginal

production cost will be smaller than in the monopoly case. The same principle applies when firms have

market power in buying. When there is a single buyer in the market (monopsonist), it sets buying prices in

the same way that a monopoly sets the selling price. When there are few buyers (oligopsonists), prices

paid to suppliers will diverge from perfectly competitive prices by a smaller amount than in the monopsony

case.

Exercise of either oligopoly or oligopsony power by retailers is harmful to shippers because both forms of

market power reduce sales of the farm commodity through retail channels. Oligopoly power at retail results

in prices set above the competitive level, which may reduce sales and divert product to alternative market

outlets, such as foodservice. Oligopsony power in procurement reduces prices to shippers below the level

that would prevail under competition. Oligopsony concerns are magnified in the produce sector because

the selling side of some produce markets is unconcentrated relative to the buying side. In many cases, the

highly perishable nature of produce makes supply at any point in time very unresponsive to price (Sexton

and Zhang, 1996). There is more flexibility in semiperishable products that can be stored and marketed

when prices are higher.

At a conceptual level, two basic factors give grocery retailers some degree of market power in selling, or

influencing prices charged to consumers. First, because consumers are dispersed geographically and

incur nontrivial transaction costs in traveling to and from stores, a typical store enjoys a modicum of market

power over nearby consumers. 5 Second, retailers can differentiate themselves (and thereby charge a premium) through the services they emphasize, advertising, and other marketing strategies. The question,

thus, is not whether retailers have the ability to influence price, but, rather, the extent and implications of

that influence.

5Market power due to location is inevitable when consumers are distributed geographically and incur nontrivial transportation costs. Even when large numbers of sellers exist in a market, any one seller competes actively with only its

nearest rival(s). In the absence of barriers to their doing so, retailers will enter a geographic market until economic profits are driven to zero. Prices will exceed marginal costs on average, however, based upon the fixed costs of entry.
Retailer Market Power6

Oligopoly power in food retailing is not amenable to

some methods used by economists to examine market

power questions because modern groceries sell so

many different products—an average of 40,000 or

more items for U.S. supermarkets. To fully examine

the market power of supermarkets, pricing behavior in

the relevant markets would have to be estimated across

all products. The structure-conduct-performance (SCP)

approach, however, can be applied by aggregating

prices into indices.7 These studies seek to explain grocery prices as a function of demand, cost, and market

structure variables. Studies such as Hall et al. (1979),

Lamm (1981), Newmark (1990), Marion et al. (1993),

and Binkley and Connor (1998) have examined average retail food price relationships, using cities as the

unit of observation.

Marion et al. (1979), Cotterill (1986), Kaufman and

Handy (1989), Cotterill and Harper (1995), and

Cotterill (1999) focused upon the behavior of individual stores, giving them the opportunity for increased

precision and relevance in construction of explanatory

variables relative to earlier studies. Cotterill (1986)

studied food retailer monopoly power in Vermont, a

sparsely populated State, and provided an almost ideal

setting to delineate relevant geographic markets for

identifying concentration. Concentration variables

(four-firm and one-firm concentration rates and the

Herfindahl index) were positively associated with price

and were statistically significant.8 A parallel study of

Arkansas supermarkets by Cotterill and Harper (1995)

and Cotterill (1999) reached similar conclusions as to

the impacts of retailer concentration on food prices.9

MacDonald (2000) argues that observed pricing patterns at retail for food items with a strong seasonal

component are consistent with models of oligopoly

rivalry among retailers.

However, not all studies of grocery retailing have

found a positive association between concentration and

price. Kaufman and Handy (1989) studied 616 supermarkets chosen from 28 cities. Both firm market share

and a four-firm Herfindahl index were negatively but

insignificantly correlated with price. Newmark (1990)

also obtained a negative and insignificant coefficient

on four-firm concentration in a study of the price of a

market basket of goods for 27 cities. Binkley and

Connor (1998) suggest one explanation for the conflicting results in terms of the product coverage in the

price variable. They found a positive and significant

concentration-price correlation for dry groceries, but a

negative and insignificant correlation for fresh and

chilled food items. 

Other investigations into food retailer pricing have

focused on the transmission of prices from farm to

retail for commodities. This research has emphasized

two primary issues: the “stickiness” of retail prices relative to farm prices, and potential asymmetries in the

transmission of price from farm to retail. Of particular

concern is the allegation that retail prices tend to

respond more quickly and fully to farm price increases

than to farm price decreases (asymmetric price transmission). To the extent that such behavior occurs, it is

harmful to producer interests. If the free-on-board

(f.o.b) price decreases due to a large harvest, but the

decrease is not transmitted to consumers, the additional

sales needed to absorb the increased production are not

achieved, exacerbating the decrease in the FOB price.

The empirical evidence on asymmetry in price transmission is mixed. Kinnucan and Forker (1987, dairy products), Pick et al. (1990, citrus), and Zhang et al. (1995,

peanuts) found evidence that retail prices and margins

were more responsive to farm price increases than

decreases. More recently, Powers and Powers (2001)

found no asymmetry in the magnitude or frequency of

price increases, relative to price decreases, for

California-Arizona lettuce, based on a sample of 40 grocers for 317 weekly observations from 1986 to 1992.

Asymmetry of price transmission, wherein farm price

increases are passed on to consumers more quickly

than farm price decreases, is less readily explained. In

a standard model of monopoly or oligopoly pricing,

the optimal price change in response to a given

increase or decrease in marginal costs may not be

Economic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  15

6The material in this section draws heavily on two studies commissioned by ERS, which were conducted by Sexton et al. and

Richards and Patterson.

7The structure-conduct-performance approach is an empirical

methodology based upon a loose conceptual framework, which

posits that conduct and, in turn, performance in an industry are

determined by structural conditions in the industry, such as degree of

concentration, entry barriers, and extent of product differentiation.

8Four-firm concentration ratio is the share of market sales made

by the four largest sellers, one-firm concentration ratio is the share

for the market leader, and the Herfindahl index is the sum of the

squares of market shares for all sellers in the market.

9Studies conducted at the city level finding a positive structureprice relationship include Hall et al. (1979), Lamm (1981), and

Marion et al. (1993).
symmetric, and depends upon the curvature of consumer demand (Azzam, 1999). This consideration,

however, does not explain a delay in responding to a

price decrease, relative to a price increase.

One of the many potential explanations for sticky or

rigid prices is that of “tacit collusion.” Firms in imperfectly competitive industries (oligopolies) enforce tacitly collusive price setting arrangements through punishment strategies based on shared recognition of trigger price (Green and Porter, 1984). To sustain tacitly

collusive pricing strategy, there must be some means

by which rivals implicitly (not formally) cooperate

with one another to fix prices. 

On the other hand, sticky or fixed prices are also consistent with many models of competitive pricing

behavior. The high cost of physically changing prices

(Slade, 1990), the desire to prevent confusion among

consumers (Bliss, 1988), the appeal of constant selling

costs (Blinder et al., 1998), and the possibility that

consumers become very price sensitive during recession (Rotemberg and Saloner, 1986) are some of the

reasons for fixed prices in competitive markets. 

The implications for competitiveness of food retailing

from the research on rigidity of retail prices and asymmetry of transmission of farm-level price changes are

not clear. Rotemberg and Saloner (1987) have shown

that sellers with market power are more likely to maintain stable prices in response to changing costs than

are competitive firms. The incentives are reversed for

price changes due to demand shifts, but Rotemberg

and Saloner showed that the cost effect dominates,

when both cost and demand are subject to

fluctuations.10 Repricing or menu costs also explain

retail price rigidities. Retailers incur costs when

changing prices, so a product’s price will be fixed

unless its marginal cost or demand changes by a sufficient amount to justify incurring the cost of repricing. 

To date, little research has been conducted on the topic

of food retailers’ oligopsony power as buyers from

food shippers and manufacturers. To a great extent, the

issue has surfaced only recently in response to concerns over slotting and related fees charged by retailers. Oligopsony power is difficult to determine because

prices paid by retailers to shippers or manufacturers

are typically confidential. Retailers’ selling costs are

also generally confidential and, moreover, almost

impossible to apportion to individual products, given

the multitude of products sold in the store. 

Produce commodities provide one of the better opportunities to examine retailer buying power because

farm-level prices are typically reported, as are shipping

costs to major consuming centers, and sales are often

direct from grower-shippers to retailers. Sexton and

Zhang [1996] examined pricing for CA-AZ iceberg

lettuce for January 1988-October 1992 and concluded

that retailers were successful in capturing most of the

market surplus (profit above harvest costs) generated

for that period, essentially consigning grower-shippers’

economic profits to near zero.

Retailer Market Power: New Findings

Two new studies investigate the relative market power

of shippers and retailers. Richards and Patterson

(2003) examine retailer market behavior in the selling

and buying of apples, oranges, grapes, and grapefruits.

Sexton et al. (2003) examine the market for iceberg

lettuce, packaged salads, and tomatoes. 

Each study combines institutional knowledge of the

industries with statistical models to test for retailer pricing behavior in regard to consumers and suppliers. The

analytical approaches used in both studies illustrate the

“new empirical industrial organization,” melding statistical methods with structural models of the industries

they consider. The techniques in the two studies are distinct, reflecting both the range of empirical models

available and some important differences in the types of

commodities analyzed in each study. In particular, the

products analyzed by Richards and Patterson are all

storable to some extent, thereby requiring that their

empirical modeling account for responsiveness of supply to current market prices, based upon incentives to

move product to and from storage. In contrast, the commodities analyzed by Sexton et al. are highly perishable;

supply at any point in time is essentially fixed by the

available harvest and, hence, unresponsive to price. 

Although the availability of microdata on retailer pricing and sales represented an important asset in conducting the two studies, neither study had direct access

to data on retailers’ costs.11 Although Richards and

16  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA

10The fundamental intuition is that as the extent of competition

increases, individual sellers perceive an increasingly elastic

demand. This makes price changes more beneficial because some

of the benefits are derived at the expense of competitors.

11Retailer costs include the cost of purchasing the fresh produce

from shippers, storage and transportation costs, and other marketing and retailing costs. The cost of purchasing fresh produce from

shippers is a large share of the retailer’s cost.
Patterson do not have direct information on retailers’

costs, they know from economic theory the variables,

such as wage rates, that determine the magnitude of

those costs. Thus, they posit a retailer cost equation,

expressed as a function of those variables and estimate

the equation as part of their statistical model. Sexton et

al., by contrast, use benchmarks to construct an upper

and lower bound for each retailer’s selling costs for

each commodity. This approach leads to a commensurate upper and lower bound on the extent to which

each retailer is exercising market power for the various

commodities in their analysis.

The retail data set used in the empirical analyses contained weekly price and sales information on selected

produce commodities.12 Retail data were obtained

from Information Resources Incorporated for 20 retail

grocery chains, operating in 6 metropolitan markets

(Albany, Atlanta, Chicago, Dallas, Los Angeles, and

Miami) over a 2-year period (January 1998- December

1999). Within these regions, the data cover small,

medium, and large supermarket retailers. Mass merchandisers, such as warehouse clubs and supercenters,

are not represented. 

The ERS Produce Marketing Study interviews indicated that a shipper could receive different prices from

different retailers, while a retailer may pay different

prices to different shippers (Calvin et al., 2001).

However, such transaction data could not be obtained.

As a substitute, prices paid by retailers to grower-shippers were approximated by f.o.b prices from USDA’s

Agricultural Marketing Service and grower organizations. F.o.b. prices represent the daily average spot

price or price range received by shippers for a specific

commodity and grade. 

Perishable Fresh Produce 

Sexton et al. (2003) examined supermarket retailers’

pricing behavior for iceberg lettuce shipped from

California and Arizona, mature-green tomatoes shipped

from Florida and California, vine-ripe tomatoes

shipped from California, and iceberg-blend fresh salads

for 20 retailer supermarkets in 6 markets (table 4).

A typical retail supermarket carries 40,000 products,

so it is not possible to evaluate the impact of retailers’

behavior on consumer welfare based only upon examination of a few produce commodities. Instead, the

effects of retailer pricing (to consumers) on the welfare

of produce grower-shippers is examined. The tendency

of some retailers to stabilize consumer prices and, in

some cases, hold them constant over the 2-year period

analyzed was shown to be generally detrimental to

producers. 

Analysis of retailer pricing behavior with regard to

consumers was limited by a lack of information on

retailers’ costs of selling produce commodities.

Reflecting this lack of information, the analysis generated a set of upper- and lower-bound estimates on the

degree of retailer oligopoly power for each commodity. The results indicate that retailers are not fully

exploiting consumers’ unresponsiveness to price

changes for produce commodities in their pricing decisions. However, the results also indicate that most

retailers are setting prices for iceberg lettuce and fresh

tomatoes in excess of marginal costs. Pricing above

marginal costs reduces produce sales at retail relative

to what would be sold under competitive pricing, and

thus is detrimental to producer welfare.

Analysis of farm-retail price spreads demonstrated that

the price spread widened as a function of the aggregate

volume of product shipped. This finding supports the

hypothesis that large volumes of these perishable commodities are used as a tool to bid down f.o.b. prices

and, thus, widen the price spread. Variations in the cost

of shipping the produce commodities to consuming

destinations had little impact on the price spread. In

general, the farm-retail price spreads are not highly

correlated across retailers, indicating that retailers

exhibit considerable independence in setting produce

prices, even within a given city.

Statistical analysis revealed evidence that grower-shippers of iceberg lettuce received lower prices for their

product than under perfect competition. Retailers were

estimated to capture, on average, about 80 percent of

the market surplus (retail price in excess of harvest

cost) for iceberg lettuce, with retailers’ share increasing as a function of the magnitude of the harvest.13

The farm price for iceberg lettuce was equivalent to

Economic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  17

12In a perfect world, researchers would have access to price and

marginal cost data, and assessing whether a firm was exerting market power would be straightforward – researchers would be able to

calculate the price-cost markup directly. Yet cost data are propriety

information. Specifically, prices paid by a firm are normally confidential. They are not available to researchers, except in isolated

cases where they were produced in the context of litigation. Thus,

the vast majority of empirical industrial organization studies rely

on publicly reported, market-average prices.

13If the market for procuring produce was perfectly competitive, the shipper would realize the entire surplus. See Sexton et al.

(2003) for more detail.
18  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA

Table 4—Results of retail price behavior

Product Average retailer share

of surplus (price over Price spread as

Market competitiveness (harvestcost) a function of quantity

Perishable fresh (Sexton et al.)

Iceberg lettuce (CA & AZ) Perfect competition in 80% Increases in 11 of 

procurement rejected 12 cases

Half of the supermarkets 

maintained constant selling 

price over the study period.

Retail prices exceed marginal 

cost, suggesting retailers influence 

consumer prices.

Florida mature green tomatoes Perfect competition in procurement 27%1 No impact

not rejected.

Retail prices exceed marginal cost,

suggesting retailers influence 

consumer prices.

CA vine-ripe tomatoes Perfect competition in 14% Increases in 7 of 9

procurement not rejected cases.

Retail prices exceed marginal cost, 

suggesting retailers influence 

consumer prices.

CA mature green tomatoes Perfect competition in 60%2 Increases in all 11 

procurement not rejected cases.

Retail prices exceed marginal

cost, suggesting retailers influence 

consumer prices.

Bagged lettuce No evidence of coordination among NA NA

retailers in pricing. Stable price for 

house brand and frequent sales for 

national brands.

Semi-perishable fresh produce 

(Richards and Patterson)

Red delicious apples (WA) Retailers influence shipper and NA Decreases in 13 of

consumer prices. 20 cases

Florida grapefruit Retailers influence shipper and NA Decreases in 13 of

consumer prices. 20 cases

Fresh CA & FL oranges Retailers exert greater influence NA Decreases in 8 of

over consumer than shipper prices. 20 cases

Fresh CA grapes Retailers do not influence shipper NA Decreases in 9 of

prices 20 cases.

Retail prices exceed marginal cost, 

suggesting retailers influence 

consumer prices.

NA - not available.

1For Florida mature green tomatoes, Sexton et al. compared retail prices to the price floor (rather than harvest cost).

2This estimate of shipper/retailer share is less precise than the other estimated shares.
harvest costs for an estimated 38 of the 104 total

observations.

Analysis of retailers’ pricing behavior for fresh tomatoes produced mixed results. In general, tomato shippers appeared to capture a larger share of the market

surplus than did iceberg lettuce shippers, and the

hypothesis of perfect competition in procurement could

not be rejected for mature-green tomatoes shipped from

either California or Florida nor for vine-ripe tomatoes

shipped from California. The price floor set for Florida

mature-green tomatoes as part of a trade dispute settlement between Florida’s and Mexico’s shippers

appeared to support the price for Florida mature greens

during the 1998 and 1999 shipping seasons.14

Lack of data precluded formal analysis of pricing

behavior of bagged salad retailers. Nonetheless, some

useful conclusions emerge based on the available

information. The 20 retailers differed markedly in the

strategies they pursued for iceberg-based salads. Some

chains carried only their own private label. Most carried a maximum of two brands. Great variety was also

exhibited in the chains’ pricing strategies. Chains that

carried multiple brands usually preferred to maintain a

stable and relatively low price for one brand (often

their private label) and use a second brand as a premium item, but with frequent sales. The data showed no

evidence of coordinated pricing for these items by

chains within a city, and price correlations were low

and often negative (indicating prices moving in opposite directions).

The study by Sexton et al. indicates that retailers are

often able to pay prices below perfectly competitive

prices to grower-shippers when procuring lettuce.

Structural conditions in these markets, including low

seller concentration relative to buyer concentration and

sale of a perishable commodity that must move to market quickly, are consistent with such an outcome. Their

results for tomatoes suggest that retailers did not pay

below-competitive prices for mature-green or vine-ripe

tomatoes. 

Their work also indicates that supermarket retailer

prices for these products were above full marginal

cost, and the wide variety of pricing strategies manifested for the commodities included in the study

rejects the notion of retailers acting as passive price

takers. However, there was no evidence of coordinated

pricing or collusion among retailers within a city. To

the extent that retailers are exercising market power,

they are exploiting the unilateral market power they

possess through geographic and brand differentiation.

Semi-Perishable Fresh Produce 

Richards and Patterson (2003) examined Washington

Red Delicious apples, California fresh grapes,

California fresh oranges, and Florida fresh grapefruit

(table 4). Analyses of the retail and shipping-point data

revealed two main points. 

• Retail prices responded more rapidly to shippingpoint price increases than to declines, although this

result was less significant for apples than for the

other commodities. 

• Retail prices are fixed relative to the variation that

occurs at the shipper level. These results suggest

that supermarket retailers influence prices in both

the commodity and retail markets. However, retail

price fixity may not be inconsistent with competitive

pricing behavior.

For Washington apples, the results suggest that retailers influence both buying and selling prices in virtually all market/chain pairs. The f.o.b.-retail margin was

found to be wider than it would be under competitive

pricing, thereby reducing both consumer and producer

welfare. Retailers’ ability to influence prices decreased

as the volume shipped increased.15 This decline in

retail bargaining power is likely due to retailers’ precommitments to higher quantities during promotional

periods and to meeting retail demands created through

their produce merchandising and category management programs.

For fresh grapes, individual retailers were unable to

influence prices they paid to shippers. Retailers, however, consistently charged consumers prices in excess

of shortrun marginal cost, although the degree of deviation from competitive pricing varied by markets.

While retailers in the Albany market showed great

influence on consumer prices, retailers in the Chicago

Economic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  19

14Data limitations forced both the California vine-ripe and

California mature-green tomato analyses to cover only the 1999

marketing year. 

15This result differs from Sexton et al. (2003). The contrasting

results follow from the perishability of their products. With storable products, shippers can withhold product from market, especially when retailer demand increases, giving the shippers

increased bargaining power. For highly perishable products, retailers are able to reduce prices as shipped volume increases. Thus,

the perishable nature of certain products grants retailers the upper

hand in setting prices.
market did not. Except for one retailer, the Dallas market appeared to be fairly competitive in both buying

and selling fresh grapes.

Retailers in fresh orange markets were found more

likely to influence consumer prices than shipper prices.

The presence of large independent packing houses and

grower cooperatives in this market may make it difficult for retailers to influence shipper prices.

Retailers had a measurable influence over prices when

buying and selling Florida grapefruit. Retailers influenced prices in buying grapefruit from shippers in 60

percent of the sample cases, and consistently set retail

prices above the perfectly competitive level when selling to consumers. Retailers’ ability to influence prices,

with respect to shippers, decreased as the volume of

sales increased. This is likely due to retailers’ need to

secure sufficient supply to meet higher quantities

demanded under periodic price promotions. 

Richards and Patterson’s study suggests that retailers

set (consumer) prices in excess of the perfectly competitive level for all four commodities. Retailers’ ability to hold shipper prices below the competitive level

was less consistent. For two of the commodities,

Washington apples and Florida grapefruits, retailers

did pay shippers prices below the perfectly competitive

level. Retailer ability to influence prices decreased,

however, as shipments of the two commodities

increased. Furthermore, shippers saw periods when

prices were competitive as well as times when prices

were noncompetitive.

20  U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825 Economic Research Service/USDA
Conclusion 

Four key developments prompted this study. First, consumer demand for greater variety and quality in fresh

produce has risen. Second, supermarkets have merged,

acquired new stores, and grown larger. Third, anecdotal

evidence suggests that the role of merchant wholesalers

in produce has faded while that of the foodservice sector has grown. And fourth, nonprice provisions such as

marketing fees have grown increasingly common in

transactions between retailers and grower-shippers.

ERS’s study of the produce industry aimed to answer

several questions. What is the current state of the produce industry? How do produce shippers and retailers

conduct business? And is the increased use of different

types of marketing fees the result of growing retailer

influence or business efficiencies?

As the average consumer now enjoys year-round availability of many fresh fruits and vegetables, pre-cut

produce, and more packaged/branded products, the

underlying marketing system has changed too. Large

self-distributing supermarkets are buying a larger share

of fresh produce directly from shippers. By 2000,

retail concentration had increased at the national level

but not at the local level. Many shippers reported little

change in the number of total customers, although

most saw fewer retail buyers and more foodservice

accounts. We found that shippers too are consolidating,

with tomato and bagged lettuce shippers among the

most concentrated. 

Advance pricing arrangements and contracts are

becoming more common. Fees and services are being

used more frequently. Volume discounts are the most

commonly imposed fee, while returnable plastic containers are the service most often requested. Slotting

fees are not used for bulk items, such as tomatoes, lettuce, grapes, grapefruit, and oranges, but are used in

the bagged salad industry. Interviewed shippers were

concerned about fees and services, fearing that they

would lose accounts if they did not comply with buyer

requests. 

Two empirical studies conducted in this project suggest retailers are able to influence prices paid to fresh

produce shippers and by consumers for some of the

commodities. Consumer prices in excess of competitive prices were evident for Washington State apples,

California oranges, Florida grapefruit, California fresh

grapes, California and Florida tomatoes, and California

and Arizona iceberg lettuce. Retailers’ ability to hold

shipper prices below competitive prices was evident

for Florida grapefruit, Washington State apples, and

iceberg lettuce, but not for California and Florida

tomatoes, California grapes, and California oranges.

These results indicate the need for future research with

regard to empirical robustness. To what extent are

these findings (of retailer market power) applicable to

produce categories not included in the study? How

would the econometric results change if we had access

to individual retailer procurement and operating cost

data? How would these results differ had the retailer

market power analyses included supercenters and mass

merchandise retailers? 

From a policy perspective, it is vital to determine

whether fees, services, and other trends like supply

chain management are the result of retailer market

power or the desire to gain distribution efficiencies.

What are the different retailer-shipper models for

procuring, marketing, and retailing produce, and what

are their implications for competition in produce markets? Which factors drive retailer pricing behavior?

How do the incidence of fees and services and the type

of fees and services vary across shippers and retailers?

Are specific fees and services used to accentuate a particular shipper or retailer’s business strength? As

researchers address these complex questions, we will

better understand competition in produce markets.

Economic Research Service/USDA U.S. Fresh Produce Markets: Marketing Channels, Trade Practices, and Retail Pricing/AER-825  21
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