| By: |
Ellickson, Paul |
| 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 |
| JEL: |
L13 L22 L81 |
| Date: |
2005 |
| URL: |
http://d.repec.org/n?u=RePEc:duk:dukeec:05-04&r=com |