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SUPERMARKETS AS A NATURAL OLIGOPOLY

Authors

  • PAUL B. ELLICKSON

    1. Ellickson: Simon School of Business Administration, University of Rochester, Rochester, NY 14627. Phone 585-273-1491, Fax 585-273-1140, E-mail paul.ellickson@simon.rochester.edu
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    • This paper is an updated version of Chapters 3 and 4 of my 2000 MIT dissertation. I would like to thank Susan Athey, Bryan Ellickson, Richard Schmalensee, Scott Stern, various seminar participants, the journal editor, and two anonymous referees for many useful comments. All remaining errors and omissions are my own.


Abstract

This paper proposes and tests a model of supermarket competition based upon an endogenous fixed cost (EFC) framework (Sutton, J. Sunk Cost and Market Structure: Price Competition, Advertising, and the Evolution of Concentration. Cambridge: MIT Press, 1991.). The relevance of the EFC framework to supermarket competition stems from the industry's surprisingly uniform competitive structure: irrespective of the size of the local market, a small number of firms (between three and six) capture the majority of sales. As markets grow, local rivalry drives firms to expand their fixed investments, limiting the number of firms that can profitably enter even the largest markets. Although markets stay concentrated, competition remains fierce, reflecting the inherently rivalrous nature of the underlying competitive mechanism. The goal of this paper is to identify the strategic focus of this rivalry, namely the drive to provide an ever greater variety of consumer products, and to eliminate alternative explanations for the observed structure by highlighting the unique form of firm conduct that characterizes this industry. (JEL D21, D43, L11, L13, L22, L81)

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