Does Sutton Apply to Supermarkets?
AbstractThis 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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Bibliographic InfoPaper provided by Duke University, Department of Economics in its series Working Papers with number 05-05.
Length: 25 pages
Date of creation: 2005
Date of revision:
Contact details of provider:
Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/
endogenous sunk costs; vertical product differentiation; oligopoly; retail; supermarkets; market concentration;
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-2005-04-11 (Agricultural Economics)
- NEP-ALL-2005-04-09 (All new papers)
- NEP-GEO-2005-04-26 (Economic Geography)
- NEP-NET-2005-04-18 (Network Economics)
- NEP-TID-2005-04-11 (Technology & Industrial Dynamics)
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