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Market Conduct in the U.S. Ready-to-Eat Cereal Industry

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  • Jeffrey J. Reimer

    (University of Wisconsin-Madison)

Abstract

Product differentiation is well established as being the key source of the cereal industry’s high price-cost margins. However, there is little consensus as to whether pricing collusion is also a source of profitability, and indeed, whether price even serves as a strategic variable in this industry. This paper seeks to resolve this debate by determining whether cereal firms strategically interact on price, and if so, estimating the extent that this increases margins relative to what perfect collusion among firms could achieve. Firms are estimated to cooperate on price to the extent that margins are 2.5 percentage points higher than what is possible under a Nash-Bertrand game. This raises margins by about 43% of what could be achieved under a perfectly executed agreement to fix prices. The results are consistent with studies in the literature that characterize the industry’s pricing as "approximately cooperative."

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Bibliographic Info

Article provided by De Gruyter in its journal Journal of Agricultural & Food Industrial Organization.

Volume (Year): 2 (2004)
Issue (Month): 1 ()
Pages: 9

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Handle: RePEc:bpj:bjafio:v:2:y:2004:i:1:n:9

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Related research

Keywords: collusion; cartel; oligopoly; cereal; shared monopoly; parallel pricing;

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References

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  1. John M. Connor, 1999. "Breakfast cereals: The extreme food industry," Agribusiness, John Wiley & Sons, Ltd., vol. 15(2), pages 247-259.
  2. Aviv Nevo, 1998. "Measuring Market Power in the Ready-to-Eat Cereal Industry," NBER Working Papers 6387, National Bureau of Economic Research, Inc.
  3. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
  4. Baker, Jonathan B & Baresnahan, Timothy F, 1985. "The Gains from Merger or Collusion in Product-differentiated Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 427-44, June.
  5. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  6. Cotterill, Ronald W. & Franklin, Andrew W. & Ma, Li Yu, 1996. "Measuring Market Power Effects in Differentiated Product Industries: An Application to the Soft Drink Industry," Research Reports 25229, University of Connecticut, Food Marketing Policy Center.
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Cited by:
  1. Golub, Alla A. & Binkley, James K., 2005. "Determinants of household choice of breakfast cereals: healthy or unhealthy?," 2005 Annual meeting, July 24-27, Providence, RI 19181, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. Jan K. Brueckner & Dan Luo, 2013. "Measuring Strategic Firm Interaction in Product-Quality Choices: The Case of Airline Flight Frequency," CESifo Working Paper Series 4066, CESifo Group Munich.
  3. Richards, Timothy J. & Patterson, Paul M., 2006. "Firm-Level Competition in Price and Variety," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 38(03), December.

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