Fixed costs determine structure of the supermarket industry

In many retail industries, the most successful firms are the ones that offer the widest selection. For example, Home Depot and Staples offer a wide array of products at competitive prices. Maintaining this variety requires substantial firm-level investments. An article published in the RAND Journal of Economics analyzes an Endogenous Fixed Cost (EFC) model of retail competition in regards to the supermarket industry, showing how escalating investments in variety-enhancing distribution systems results in a few high-quality firms that can greatly influence price and other market factors.

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