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

72 Pages Posted: 25 May 2006 Last revised: 16 Jun 2021

See all articles by Aviv Nevo

Aviv Nevo

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: January 1998

Abstract

The ready-to-eat cereal industry is characterized by high concentration 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 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 to maintain a portfolio of differentiated products influence the perceived quality of these products, and it is these two factors that lead to high price-cost margins.

Suggested Citation

Nevo, Aviv, Measuring Market Power in the Ready-to-Eat Cereal Industry (January 1998). NBER Working Paper No. w6387, Available at SSRN: https://ssrn.com/abstract=226135

Aviv Nevo (Contact Author)

Northwestern University - Department of Economics ( email )

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