Supermarkets as a Natural Oligopoly
Economic Inquiry, 51(2), pp. 1142-1154, 2013.
20 Pages Posted: 17 Aug 2011 Last revised: 29 Sep 2017
Date Written: August 1, 2011
This paper proposes and tests a model of supermarket competition based upon John Sutton's (1991) endogenous fixed cost (EFC) framework. The relevance of the EFC framework to supermarket competition stems from the industry's surprisingly uniform competitive structure: irrespective of the size of the local market, a small number of firms (between 3 and 6) capture the majority of sales. As markets grow, local rivalry drives firms to expand their fixed investments, limiting the number of firms that can profitably enter even the largest markets. Although markets stay concentrated, competition remains fierce, reflecting the inherently rivalrous nature of the underlying competitive mechanism. The goal of this paper is to identify the strategic focus of this rivalry, namely the drive to provide an ever greater variety of consumer products, and to eliminate alternative explanations for the observed structure by highlighting the unique form of firm conduct that characterizes this industry.
Keywords: endogenous fixed costs, vertical product differentiation, retail, market concentration, complementarity
JEL Classification: L13, L22, L81
Suggested Citation: Suggested Citation