Does Sutton Apply to Supermarkets?
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.
|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/
When requesting a correction, please mention this item's handle: RePEc:duk:dukeec:05-05. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Department of Economics Webmaster)
If references are entirely missing, you can add them using this form.