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

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 non-price 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 parts: (1) that which is due to product differentiation; (2) that which is due to multi-product firm pricing; and (3) 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 markups. I conclude that prices in the industry are consistent with non-collusive pricing behavior, despite the high price-cost margins. Leading firms are able to maintain a portfolio of differentiated products, and influence the perceived quality of these products, and it is these two factors that lead to high price-cost margins.


Issue Date:
1998
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/25164
Total Pages:
38
Series Statement:
Research Report No. 37




 Record created 2017-04-01, last modified 2017-08-24

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