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Market Power and the Demsetz Quality Critique: An Evaluation for Food Retailing

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  • Ronald W. Cotterill
  • C. David Harper
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    Abstract

    This study analyzes supermarket firm prices to determine whether prices are related to market structure and whether the Demsetz quality critique is valid. Factor analysis is used 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 hypothesis) and whether a more concentrated market structure is directly related to higher price (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. 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 critique is rejected. Other factors that affect price include store format, whether a firm competes against warehouse supermarkets, store cost, and market demand factors.

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    File URL: http://fmpc.uconn.edu/publications/rr/rr29.pdf
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    Bibliographic Info

    Paper provided by University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Food Marketing Policy Center Research Reports with number 029.

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    Date of creation: 1994
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    Handle: RePEc:zwi:fpcrep:029

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    Keywords: Demand and Price Analysis; Industrial Organization;

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