Does Sutton apply to supermarkets?

Abstract

This paper presents empirical evidence that endogenous fixed costs play a central role in determining the equilibrium structure of the supermarket industry. Using the framework developed in Sutton (1991), I construct a model of supermarket competition where escalating investment in firm level distribution systems is driven by the incentive to produce a greater variety of products in every store. Using the observed networks of store and warehouse locations, I identify 51 distinct geographic markets covering nearly the entire United States and empirically verify their relative independence. Employing a store level census, I demonstrate that the industrial organization of these markets is a natural oligopoly in which a small number of firms (between 4 and 6) capture the majority of sales, regardless of market size. While the total number of firms does scale up with the size of the market, the expansion is limited to a competitive fringe of low quality stores.