Market Conduct in the U.S. Ready-to-Eat Cereal Industry

Abstract

Product differentiation is well established as being the key source of the cereal industry's high price-cost margins. However, there is little consensus as to whether pricing collusion is also a source of profitability, and indeed, whether price even serves as a strategic variable in this industry. This paper seeks to resolve this debate by determining whether cereal firms strategically interact on price, and if so, estimating the extent that this increases margins relative to what perfect collusion among firms could achieve. Firms are estimated to cooperate on price to the extent that margins are 2.5 percentage points higher than what is possible under a Nash-Bertrand game. This raises margins by about 43% of what could be achieved under a perfectly executed agreement to fix prices. The results are consistent with studies in the literature that characterize the industry's pricing as "approximately cooperative."

Keywords: collusion, differentiation, firm, firms, product differentiation

JEL Classification: L13, L41, L66