Differences in Differentiation: Rising Variety and Markups in Retail Food Stores

72 Pages Posted: 2 Dec 2020 Last revised: 11 Jun 2021

Date Written: May 5, 2021

Abstract


In this paper I show that consumers in food stores and supermarkets/hypermarkets became significantly less price sensitive between 2006 and 2017. At the median, across thousands of stores and products in nine large categories, estimated own-price elasticities have declined by 25% over this period. I argue that these changes are likely due in part to improved supply chain management, which has led stores to offer a larger variety of goods which better match consumers’ individual preferences. I show that newer products are indeed more “niche” in this sense, and that other potential sources of rising differentiation including increases in quality and changes in consumer wealth play a smaller role. Markups implied by a monopolistic pricing rule suggest that the observed rise in differentiation was large enough to generate significant increases in firms’ markups absent any changes in pricing behavior or competition.

Keywords: Differentiation, retail demand, markups, niche goods

JEL Classification: L11, L25

Suggested Citation

Brand, James, Differences in Differentiation: Rising Variety and Markups in Retail Food Stores (May 5, 2021). Available at SSRN: https://ssrn.com/abstract=3712513 or http://dx.doi.org/10.2139/ssrn.3712513

James Brand (Contact Author)

Microsoft ( email )

Redomond, WA 98052

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