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

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  • Aviv Nevo

    (Economics Department, University of California)

Abstract

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 sources: (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 product quality. It is these two factors that lead to high price-cost margins.

Suggested Citation

  • Aviv Nevo, 2003. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Microeconomics 0303006, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpmi:0303006
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    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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