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.
Type
Journal articlePermalink
https://hdl.handle.net/10161/2626Published Version (Please cite this version)
10.1111/j.1756-2171.2007.tb00043.xCitation
Ellickson, P. B. "Does Sutton Apply to Supermarkets?" Rand Journal of Economics 38.1
(2007): 43-59. Print.
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