Does Sutton apply to supermarkets

This paper presents empirical evidence that endogenous fixed costs play a central role in deter-mining the equilibrium structure of the supermarket industry. Using the framework developed in Sutton (1991), I construct a model of supermarket competition where escalating investment in firm level distribution systems is driven by the incentive to produce a greater variety of products in every store. Employing a store level census and 51 distinct geographic markets, I demonstrate that the supermarket industry is a natural oligopoly in which a small number of firms (between 4 and 6) capture the majority of sales, regardless of market size.