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Does Sutton Apply to Supermarkets?

  • Ellickson, Paul

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.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 05-05.

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Length: 25 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:duk:dukeec:05-05
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Web page: http://econ.duke.edu/

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