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Supermarkets as a Natural Oligopoly

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  • Ellickson, Paul

Abstract

This 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.

Suggested Citation

  • Ellickson, Paul, 2005. "Supermarkets as a Natural Oligopoly," Working Papers 05-04, Duke University, Department of Economics.
  • Handle: RePEc:duk:dukeec:05-04
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    Cited by:

    1. Ronald S. Jarmin & Shawn D. Klimek & Javier Miranda, 2009. "The Role of Retail Chains: National, Regional and Industry Results," NBER Chapters,in: Producer Dynamics: New Evidence from Micro Data, pages 237-262 National Bureau of Economic Research, Inc.
    2. Sodano, Valeria & Hingley, Martin, 2007. "Channel Management and differentiation strategies: A case study from the market for fresh produce," 105th Seminar, March 8-10, 2007, Bologna, Italy 7869, European Association of Agricultural Economists.
    3. Eckel, Carsten, 2007. "International trade and retailing: Diversity versus accessibility and the creation of retail deserts," Center for European, Governance and Economic Development Research Discussion Papers 66, University of Goettingen, Department of Economics.
    4. Louis-Philippe Sirois & Sophie Marmousez & Dan Simunic, 2012. "Big 4 and non-Big 4 Audit Production Costs: Office Level Audit Technology and the Impact on Audit Fees," Post-Print hal-00691147, HAL.
    5. Valeria Sodano, 2008. "Innovation and food system sustainability: public concerns vs. private interests," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 1108, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
    6. Bart Bronnenberg & Sanjay Dhar & Jean-Pierre Dubé, 2011. "Endogenous sunk costs and the geographic differences in the market structures of CPG categories," Quantitative Marketing and Economics (QME), Springer, vol. 9(1), pages 1-23, March.
    7. Astrid A. Dick, 2003. "Market structure and quality: an application to the banking industry," Finance and Economics Discussion Series 2003-14, Board of Governors of the Federal Reserve System (U.S.).
    8. Emek Basker & Michael Noel, 2009. "The Evolving Food Chain: Competitive Effects of Wal-Mart's Entry into the Supermarket Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 977-1009, December.
    9. Celikkol, Pinar & Dunn, James W. & Stefanou, Spiro E., 2003. "Policy Reform Impact on Food Manufacturing," Policy Reform and Adjustment Workshop, October 23-25, 2003, Imperial College London, Wye Campus 15743, International Agricultural Policy Reform and Adjustment Project (IAPRAP).
    10. Andrew Cohen & Michael Mazzeo, 2004. "Competition, product differentiation and quality provision: an empirical equilibrium analysis of bank branching decisions," Finance and Economics Discussion Series 2004-46, Board of Governors of the Federal Reserve System (U.S.).
    11. James G. Mulligan & Nilotpal Das, 2005. "Persistent Adoption of Time-Saving Process Innovations," Working Papers 05-03, University of Delaware, Department of Economics.
    12. Sodano, Valeria, 2008. "Innovation and Food System Sustainability: Public Concerns vs Private Interests," 110th Seminar, February 18-22, 2008, Innsbruck-Igls, Austria 49891, European Association of Agricultural Economists.

    More about this item

    Keywords

    endogenous sunk costs; vertical product differentiation; oligopoly; retail; supermarkets; market concentration; dartboard; complementarity;

    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

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