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Measuring Market Power in the Ready-to-Eat Cereal Industry

  • Aviv Nevo

    (Economics Department, University of California)

The 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 sources: (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 product quality. It is these two factors that lead to high price-cost margins.

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Paper provided by EconWPA in its series Microeconomics with number 0303006.

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Length: 50 pages
Date of creation: 27 Mar 2003
Date of revision:
Handle: RePEc:wpa:wuwpmi:0303006
Note: 50 pages, Adobe.pdf
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Aviv Nevo & Catherine Wolfram, 1999. "Prices and Coupons for Breakfast Cereals," NBER Working Papers 6932, National Bureau of Economic Research, Inc.
  2. Aviv Nevo, 2003. "Mergers with Differentiated Products: The Case of Ready-to-Eat Cereal," Finance 0303004, EconWPA.
  3. Steven Berry & James Levinsohn & Ariel Pakes, 2001. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," Cowles Foundation Discussion Papers 1337, Cowles Foundation for Research in Economics, Yale University.
  4. Nevo, Aviv, 1999. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Competition Policy Center, Working Paper Series qt7cm5p858, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  5. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn.
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  9. Aviv Nevo, 1998. "A Research Assistant's Guide to Random Coefficients Discrete Choice Models of Demand," NBER Technical Working Papers 0221, National Bureau of Economic Research, Inc.
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  19. Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, vol. 52(2), pages 345-62, March.
  20. Gasmi, Farid & Laffont, Jean-Jacques & Vuong, Quang, 1992. "Econometric Analysis of Collusive Behavior in a Soft Drink Market," IDEI Working Papers 16, Institut d'Économie Industrielle (IDEI), Toulouse.
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  25. Nevo, Aviv, 1998. "Identification of the oligopoly solution concept in a differentiated-products industry," Economics Letters, Elsevier, vol. 59(3), pages 391-395, June.
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