Supermarkets as a Natural Oligopoly
AbstractThis paper uses a model of endogenous sunk cost (ESC) competition to explain the industrial structure of the supermarket industry, where a few powerful chains provide high quality products at low prices. The predictions of this model accord well with the features of the supermarket industry documented here. Using a novel dataset of store level observations, I demonstrate that 1) the same number of high quality firms enter markets of varying sizes and compete side by side for the same consumers and 2) quality increases with the size of the market. In addition to documenting a local structure of competition consistent with the ESC framework, I demonstrate that the choice of quality by rival firms behaves as a strategic complement. This key finding, which is consistent with an ESC model of quality enhancing sunk outlays, eliminates several alternative explanations of concentration in the supermarket industry, including most standard models of cost-reducing investment and product proliferation. These results suggest that the competitive mechanisms sustaining high levels of concentration in the supermarket industry are inherently rivalrous and unlikely to lead to the emergence of a single dominant firm.
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Bibliographic InfoPaper provided by Duke University, Department of Economics in its series Working Papers with number 05-04.
Length: 31 pages
Date of creation: 2005
Date of revision:
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endogenous sunk costs; vertical product differentiation; oligopoly; retail; supermarkets; market concentration; dartboard; complementarity;
Find related papers by JEL classification:
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
This paper has been announced in the following NEP Reports:
- NEP-AGR-2005-04-09 (Agricultural Economics)
- NEP-ALL-2005-04-09 (All new papers)
- NEP-BEC-2005-04-09 (Business Economics)
- NEP-COM-2005-04-09 (Industrial Competition)
- NEP-IND-2005-04-09 (Industrial Organization)
- NEP-MIC-2005-04-09 (Microeconomics)
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