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

Open access
Nevo, Aviv·2001·Econometrica
DOI 10.1111/1468-0262.00194
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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.

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Metadata

Authors
Nevo, A.
Venue
Econometrica
Publisher
The Econometric Society
Published
2001-03
Volume
69
Issue
2
Pages
307-342
ISSN
  • 0012-9682 (ISSN-L)
  • 1468-0262
DOI
10.1111/1468-0262.00194
OpenAlex
W1526528820
Cited by
2,064
References
1
FWCI
34.30
Type
journal article
Language
en
Open access
green
Licence
doi.wiley.com/10.1002/tdm_license_1.1 (tdm, 5297 d)

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Nevo, A. (2001). Measuring Market Power in the Ready-to-Eat Cereal Industry. Econometrica. https://doi.org/10.1111/1468-0262.00194

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