The High Cost of ‘Grocery Pricing Fairness’
TL;DR
Background: Several states, including New York, are considering “grocery pricing fairness” legislation aimed at supporting small independent grocers. These proposals—such as New York’s Senate Bill S8563—would require large grocery suppliers to offer identical prices and contract terms to all retailers that purchase the same quantity of goods. Supporters argue that large retailers use their buying power to secure discounts that squeeze smaller stores and contribute to food deserts in low-income communities.
But… Mandating identical wholesale pricing removes suppliers’ incentive to offer discounts and would likely raise grocery prices across the board. In competitive markets, price differences typically reflect real efficiencies. Large retailers that buy in high volumes sharply reduce suppliers’ distribution and marketing costs.
Laws that require suppliers to extend any discount immediately to all buyers would discourage discounting altogether. Suppliers would instead adopt uniform—and higher—prices to reduce legal risk. The so-called “waterbed effect” invoked to justify this legislation has extremely limited empirical support.
Moreover… The bills’ strict disclosure requirements could unintentionally weaken competition. By forcing suppliers to share ostensibly anonymized pricing terms, the legislation may facilitate price coordination. Economic research shows that greater price transparency in concentrated markets makes it easier for firms to detect deviations from prevailing price levels. That dynamic discourages competitive discounting and can lead to higher average prices for consumers.
KEY TAKEAWAYS
A Leaky Theory
Proponents of pricing-fairness bills argue that when dominant retailers secure deep wholesale discounts, suppliers offset the lost revenue by charging smaller grocers higher prices. This “waterbed effect” claims discounts for large buyers force suppliers to raise prices for smaller ones, harming consumers overall. The theory applies only under narrow market conditions that these state bills do not empirically establish.
In practice, suppliers price based on what each buyer is willing and able to pay. If suppliers could profitably charge small grocers more, standard microeconomic theory suggests they would already do so.
Courts and regulators have also rejected the theory in real-world cases. In DeHoog v. Anheuser-Busch InBev, the court dismissed a waterbed claim as overly speculative, noting that antitrust law protects allegedly squeezed sellers—not the buyer’s competitors. Likewise, the United Kingdom’s Competition Commission investigated the grocery sector and found “little evidence” of an immediate waterbed effect, concluding the theory had limited practical relevance in retail food markets.
Transparency’s Dark Side
Legislation like New York’s S8563 would require large suppliers to provide anonymized terms of sale from contracts with dominant retailers within 14 days of a formal request. Lawmakers frame the requirement as a transparency measure. Turning highly competitive, private pricing information into a quasi-public document risks enabling market coordination.
Nobel laureate George Stigler’s foundational paper, “A Theory of Oligopoly,” explains why. Sustained coordination in concentrated markets depends on firms’ ability to detect deviations from a shared pricing norm. When companies can readily observe each other’s pricing, the threat of rapid retaliation becomes credible. The incentive to undercut coordinated prices largely disappears.
The assumption that these disclosures can remain truly “anonymized” is also outdated. Recent peer-reviewed research shows that large language models can readily re-identify corporate entities from supposedly anonymized text.
The Discount That Disappears
If the law forces suppliers to extend identical wholesale discounts to all buyers—regardless of genuine economic efficiencies like predictable bulk ordering or streamlined logistics—suppliers will respond rationally. They will eliminate targeted discounts and move to uniform, higher prices. Standardizing prices in this way would have strongly regressive effects.
Economist Emek Basker reviewed the grocery-retail literature and found that Walmart’s grocery prices are typically about 10% lower than those of its competitors. Walmart’s entry into a local market also forces incumbent traditional stores to cut prices by 1% to 3%.
Jerry Hausman and Ephraim Leibtag used comprehensive household panel data to estimate that large-format supercenters generate substantial consumer-welfare gains, with disproportionately large benefits for low-income households. Legislation that effectively bans the volume discounts supporting these large-format stores would quickly erase that retail price advantage—imposing the greatest burden on the same low-income consumers the bills claim to protect.
Looking in the Wrong Aisle
These bills are partly justified as a response to “food deserts”—areas with limited access to affordable, nutritious food. Robust empirical research suggests wholesale pricing differences play only a minor role in long-term nutritional inequality.
Economist Hunt Allcott and his co-authors simulated what would happen if low-income households had the same physical store access and identical prices as higher-income households. They found that equalizing access and prices would reduce overall nutritional inequality by only about 10%. The remaining 90% reflects persistent differences in consumer demand patterns.
Legislation that targets wholesale grocery pricing therefore operates on the margins and does little to address the deeper causes of localized food deserts.
Discounts on Trial
The enforcement mechanisms embedded in these bills—such as private lawsuits and treble damages for perceived violations—create substantial litigation risk that will deter procompetitive behavior.
The bipartisan Antitrust Modernization Commission’s 2007 report documented a nearly identical dynamic under the federal Robinson-Patman Act. The commission found that the constant threat of litigation led risk-averse firms to abandon aggressive discounting, resulting in higher prices for consumers.
Policymakers seeking to improve food access should instead pursue targeted interventions, such as municipal zoning reforms and improvements to transit networks.
For further analysis, see the ICLE issue brief “The Waterbed Effect and the Price of ‘Pricing Fairness.’”