Measuring market power in the ready-to-eat cereal industry

Aviv Nevo

Research output: Contribution to journalArticlepeer-review

738 Scopus citations

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 nonprice 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: (i) that which is due to product differentiation; (ii) that which is due to multi-product firm pricing; and (iii) 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 margins. I conclude that prices in the industry are consistent with noncollusive 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.

Original languageEnglish (US)
Pages (from-to)307-342
Number of pages36
JournalEconometrica
Volume69
Issue number2
DOIs
StatePublished - Mar 2001

Keywords

  • Discrete choice models
  • Market power
  • Price competition
  • Product differentiation
  • Random coefficients
  • Ready-to-eat cereal industry

ASJC Scopus subject areas

  • Economics and Econometrics

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