Supermarkets as a Natural Oligopoly

Paul Ellickson

No 05-04, Working Papers from Duke University, Department of Economics

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.

Keywords: endogenous sunk costs; vertical product differentiation; oligopoly; retail; supermarkets; market concentration; dartboard; complementarity (search for similar items in EconPapers)
JEL-codes: L13 L22 L81 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2005
New Economics Papers: this item is included in nep-agr, nep-bec, nep-com, nep-ind and nep-mic
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:duk:dukeec:05-04

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