Saturday, August 25, 2007

Why Such a High Mark-Up on Corn Flakes?

Posted by D. Daniel Sokol

In the wake of the crushing setback for the FTC in the Whole Foods/Wild Oats merger case, I thought it might be interesting to look through some of the agricultural economics literature on supermarket competition.  In the forthcoming issue of  the American Journal of Agricultural Economics, there is a great article by Benaissa Chidmi and Rigoberto Lopez of the University of Connecticut Department of Agricultural and Applied Economics that explains competition in breakfast cereals in Brand-Supermarket Demand for Breakfast Cereals and Retail Competition.

The Berry, Levinsohn, and Pakes (1995) market equilibrium model is extended to the supermarket chain level to examine consumer choices and retail competition for thirty-seven brands of breakfast cereals in Boston. Estimated taste parameters for product characteristics vary significantly across consumers. Although consumers are price-sensitive with respect to their chosen cereals, they exhibit strong brand and supermarket loyalty. Retail markups increase and marginal costs decrease with grocery market shares, attesting to oligopoly power with efficiencies. Markups decrease with the own-price elasticity of demand, with Corn Flakes having the highest markups. A detailed picture of consumer response and supermarket competition is provided.

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