Supermarkets as a Natural Oligopoly

This paper proposes and tests a model of supermarket competition based upon John Suttons (1991) endogenous \u85xed cost (EFC) framework. The relevance of the EFC framework to supermar-ket competition stems from the industrys surprisingly uniform competitive structure: irrespective of the size of the local market, a small number of \u85rms (between 3 and 6) capture the majority of sales. As markets grow, local rivalry drives \u85rms to expand their \u85xed investments, limiting the number of \u85rms that can pro\u85tably enter even the largest markets. Although markets stay con-centrated, competition remains \u85erce, reecting 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 alterna-tive explanations for the observed structure by highlighting the unique form of \u85rm conduct that characterizes this industry