Cereal Market in Boston

In this paper we estimate a discrete choice demand model with random coefficients for 37 brands of ready-to-eat cereals (RTECs) at the supermarket chain level in the Boston area. Then assuming a manufacturer Stacklberg model for vertical pricing, we decompose the market channel price-cost margins (PCMs) for individual brands at four supermarket chains. The results shed light on the share of channel profits accruing to individual RTEC manufacturers and retailers. For instance, Stop & Shop, the leading supermarket chain in Boston, gets greater dollar profits than smaller supermarket chains. In spite of this, smaller supermarkets, especially those with urban locations, charge higher prices due in part to higher retailing costs. Finally, the results also show that both manufacturers and retailers dropped their RTEC prices in 1996 under a regulatory threat provoked by a scandal of supra-normal RTEC prices