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

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Aviv Nevo

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6387.

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Date of creation: Jan 1998
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Handle: RePEc:nbr:nberwo:6387

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Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Aviv Nevo, 1998. "A Research Assistant's Guide to Random Coefficients Discrete Choice Models of Demand," NBER Technical Working Papers 0221, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Nevo, Aviv, 1998. "Identification of the oligopoly solution concept in a differentiated-products industry," Economics Letters, Elsevier, vol. 59(3), pages 391-395, June. [Downloadable!] (restricted)
  3. Steven Berry & James Levinsohn & Ariel Pakes, 1998. "Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market," NBER Working Papers 6481, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Gasmi, Farid & Laffont, Jean-Jacques & Vuong, Quang, 1992. "Econometric Analysis of Collusive Behavior in a Soft Drink Market," IDEI Working Papers 16, Institut d'Économie Industrielle (IDEI), Toulouse.
    Other versions:
  5. Steven Berry & Michael Carnall & Pablo T. Spiller, 1996. "Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity," NBER Working Papers 5561, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, vol. 52(2), pages 345-62, March. [Downloadable!] (restricted)
  7. Pakes, Ariel S, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," Econometrica, Econometric Society, vol. 54(4), pages 755-84, July. [Downloadable!] (restricted)
  8. Aviv Nevo, 1997. "Mergers with Differentiated Products: The Case of Ready-to-Eat Cereal," Competition Policy Center, Working Paper Series CPC99-002, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
    Other versions:
  9. Jerry A. Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annales d'Economie et de Statistique, ADRES, issue 34, pages 07, Avril-Jui. [Downloadable!]
  10. Aviv Nevo & Catherine Wolfram, 1999. "Prices and Coupons for Breakfast Cereals," NBER Working Papers 6932, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Hausman, Jerry & McFadden, Daniel, 1984. "Specification Tests for the Multinomial Logit Model," Econometrica, Econometric Society, vol. 52(5), pages 1219-40, September. [Downloadable!] (restricted)
    Other versions:
  12. Aviv Nevo, 1998. "Measuring Market Power in the Ready-to-Eat Cereal Industry," NBER Working Papers 6387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January. [Downloadable!] (restricted)
  14. Corts, Kenneth S., 1998. "Conduct parameters and the measurement of market power," Journal of Econometrics, Elsevier, vol. 88(2), pages 227-250, November. [Downloadable!] (restricted)
  15. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer. [Downloadable!] (restricted)
  16. Daniel McFadden & Kenneth Train, 2000. "Mixed MNL models for discrete response," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 447-470. [Downloadable!]
  17. Stanley, Linda R & Tschirhart, John, 1991. "Hedonic Prices for a Nondurable Good: The Case of Breakfast Cereals," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 537-41, August. [Downloadable!] (restricted)
  18. Richard Schmalensee, 1978. "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 305-327, Autumn. [Downloadable!] (restricted)
  19. Ariel Pakes, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," NBER Working Papers 1340, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  20. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June. [Downloadable!] (restricted)
  21. Fisher, Franklin M & McGowan, John J, 1983. "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits," American Economic Review, American Economic Association, vol. 73(1), pages 82-97, March.
  22. Jerry A. Hausman, 1996. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Chapters, in: The Economics of New Goods, pages 207-248 National Bureau of Economic Research, Inc. [Downloadable!]
  23. Hausman, Jerry A & Wise, David A, 1978. "A Conditional Probit Model for Qualitative Choice: Discrete Decisions Recognizing Interdependence and Heterogeneous Preferences," Econometrica, Econometric Society, vol. 46(2), pages 403-26, March. [Downloadable!] (restricted)
    Other versions:
  24. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July. [Downloadable!] (restricted)
  25. Hausman, Jerry A., 1983. "Specification and estimation of simultaneous equation models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 7, pages 391-448 Elsevier. [Downloadable!] (restricted)
  26. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1.
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