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

Aviv Nevo
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Aviv Nevo: Economics Department, University of California

Microeconomics from EconWPA

Abstract: 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.

JEL-codes: D4 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com
Date: Written 2003-03-27
Note: 50 pages, Adobe.pdf
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