Does Sutton Apply to Supermarkets?

Paul Ellickson

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

Abstract: 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.

Keywords: endogenous sunk costs; vertical product differentiation; oligopoly; retail; supermarkets; market concentration (search for similar items in EconPapers)
JEL-codes: L13 L22 L81 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2005
New Economics Papers: this item is included in nep-agr, nep-geo, nep-net and nep-tid
References: Add references at CitEc
Citations: View citations in EconPapers (29)

Downloads: (external link)
http://www.econ.duke.edu/Papers/Abstracts05/abstract.05.05.html main text

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

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

Access Statistics for this paper

More papers in Working Papers from Duke University, Department of Economics Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097.
Bibliographic data for series maintained by Department of Economics Webmaster ().