Does Sutton Apply to Supermarkets?

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Does Sutton Apply to Supermarkets?

Author Info

Ellickson, Paul

Abstract

This paper presents empirical evidence that endogenous sunk costs play a central role in determining the equilibrium structure of the supermarket industry. Using the endogenous sunk cost (ESC) framework developed in Sutton (1991), I construct a model of supermarket competition where escalating investment in firm level distribution systems is driven by the incentive to produce a greater variety of products in every store. Using the observed networks of store and warehouse locations, I identify 51 distinct geographic markets covering nearly the entire United States and empirically verify their relative independence. Employing a dataset consisting of every supermarket operating in these markets, I establish the existence of a lower bound to concentration that remains strictly positive as market size expands. Furthermore, I am able to verify that this non-fragmentation result applies only to firms that have built their own distribution networks, as the model predicts.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 05-05.

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Length: 25 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:duk:dukeec:05-05

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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-GEO-2005-04-09 (Economic Geography)
NEP-NET-2005-04-09 (Network Economics)
NEP-TID-2005-04-09 (Technology & Industrial Dynamics)

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Alexei Alexandrov, 2006. "Fat Products," Discussion Papers 1435, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
Carsten Eckel, 2007. "International Trade and Retailing: Diversity versus Accessibility and the Creation of \"Retail Deserts\"," cege â Center for European, Governance and Economic Development Research Discussion Papers 66, cege – Center for European, Governance and Economic Development Research, University of Goettingen (Germany).. [Downloadable!]

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