Measuring Market Power in the Ready-To-Eat Cereal Industry
AbstractThe ready-to-eat cereal industry is characterized by high concentration, high price-cost margins, large advertising to sales ratios, and numerous introductions of new products. Previous researchers have concluded that the ready-to-eat cereal industry is a classic example of an industry with nearly collusive pricing behavior and intense non-price competition. This paper empirically examines this conclusion. In particular, I estimate price-cost margins, but more importantly I am able empirically to separate these margins into three parts: (1) that which is due to product differentiation; (2) that which is due to multi-product firm pricing; and (3) that due to potential price collusion. The results suggest that given the demand for different brands of cereal, the first two effects explain most of the observed price-cost markups. I conclude that prices in the industry are consistent with non-collusive pricing behavior, despite the high price-cost margins. Leading firms are able to maintain a portfolio of differentiated products, and influence the perceived quality of these products, and it is these two factors that lead to high price-cost margins.
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Bibliographic InfoPaper 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 037.
Date of creation: 1998
Date of revision:
discrete choice models; random coefficients; product differentiation; ready-to-eat cereal industry; market power; price competition; Agribusiness; Demand and Price Analysis; Industrial Organization;
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