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Market power and the Demsetz quality critique: An evaluation for food retailing

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  • Ronald W. Cotterill

    (Food Marketing Policy Center, University of Connecticut, Storrs, CT 06269-4021)

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    Abstract

    This study uses factor analysis to identify five service factors that are modeled with price as endogenous variables in a simultaneous equations framework to test whether a more concentrated market structure is related to higher service levels, which, in turn, are related to higher prices (the Demsetz quality critique) or whether a more concentrated market structure is directly related to higher prices (market power hypothesis). For this study of supermarkets in 34 local markets in six southwestern states, market share and concentration are not significantly related to any service factors. However, concentration has a significant positive relationship with price in the full sample, and share also is significantly related to price in subsamples of large, leading firms. Thus, the Demsetz quality critique is rejected. Also coordinated rather than unilateral effects seem predominant. When examining store size, superstores enjoy economics up to 50,000 square feet, but most of the cost savings are offset by pricing power related to increased services levels. © 1999 John Wiley & Sons, Inc.

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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Agribusiness.

    Volume (Year): 15 (1999)
    Issue (Month): 1 ()
    Pages: 101-118

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    Handle: RePEc:wly:agribz:v:15:y:1999:i:1:p:101-118

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    Web page: http://onlinelibrary.wiley.com/journal/10.1002/(ISSN)1520-6297

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    1. Evans, William N & Froeb, Luke M & Werden, Gregory J, 1993. "Endogeneity in the Concentration-Price Relationship: Causes, Consequences, and Cures," Journal of Industrial Economics, Wiley Blackwell, vol. 41(4), pages 431-38, December.
    2. MacDonald, James M. & Nelson, Paul Jr., 1991. "Do the poor still pay more? Food price variations in large metropolitan areas," Journal of Urban Economics, Elsevier, vol. 30(3), pages 344-359, November.
    3. Nelson, Philip & Siegfried, John J & Howell, John, 1992. "A Simultaneous Equations Model of Coffee Brand Pricing and Advertising," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 54-63, February.
    4. Hall, Lana & Schmitz, Andrew & Cothern, James, 1979. "Beef Wholesale-Retail Marketing Margins and Concentration," Economica, London School of Economics and Political Science, vol. 46(183), pages 295-300, August.
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    Cited by:
    1. Chih-ching Yu & John M. Connor, 2002. "The price-concentration relationship in grocery retailing: Retesting Newmark," Agribusiness, John Wiley & Sons, Ltd., vol. 18(4), pages 413-426.
    2. Volpe, Richard J., III & Lavoie, Nathalie, 2005. "The Effect of Wal-Mart Supercenters on Grocery Prices in New England," 2005 Annual meeting, July 24-27, Providence, RI 19188, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Francisco J. Más & Ricardo Sellers, 2006. "Technical Efficiency In The Retail Food Industry: The Influence Of Inventory Investment, Wage Levels, And Age Of The Firm," Working Papers. Serie EC 2006-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    4. Ronald Cotterill & William Putsis, 2000. "Market Share and Price Setting Behavior for Private Labels and National Brands," Review of Industrial Organization, Springer, vol. 17(1), pages 17-39, August.
    5. Ville Aalto-Setälä & Jouko Kinnunen & Katri Koistinen, 2004. "Reasons for high food prices in small market areas: The case of the Åland Islands," Agribusiness, John Wiley & Sons, Ltd., vol. 20(1), pages 17-29.
    6. Richard J. Volpe III & Nathalie Lavoie, 2006. "The Effect of Wal-Mart Supercenters on Grocery Prices in New England," Working Papers 2006-8, University of Massachusetts Amherst, Department of Resource Economics.

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