Rational addiction, retail pricing and profit margins

Date of Completion

January 2009


Economics, Agricultural




This dissertation consists of three essays of empirical industrial organization. Chapter one applies the Becker-Murphy (1988) theory of rational addiction to the case of carbonated soft drinks, using a time-varying parameter model and scanner data from 46 U.S. cities. The empirical results show strong evidence that carbonated soft drinks are rationally addictive, thereby providing a rationale for government intervention. Chapter two applies Markov switching regressions to a dynamic oligopolistic competition model (Maskin and Tirole, 1988) with four pricing regimes, using scanner data on fluid milk from the Boston, Dallas/Fort Worth, and Seattle markets. The empirical results confirm the existence of two sets of Markov perfect equilibria of the dynamic game, show their welfare implications, and that the marginal cost pricing regime is not the most prevalent one. Chapter three quantifies the impact of Wal-Mart Supercenters on supermarkets profitability via a two-stage dynamic entry game, using simulated methods of moment and milk scanner data from Dallas/Fort Worth supermarkets. The empirical findings show that the entry of Wal-Mart Supercenters accounts for about an average of 50% decreases in profit margins for incumbent supermarkets. The effect of scale of economies is found to be more significant for Wal-Mart Supercenters than for incumbent supermarkets. ^