Aviv Nevo analyzes the ready-to-eat cereal industry to measure market power. The industry is characterized by high concentration, high price-cost margins, large advertising-to-sales ratios, and frequent product introductions. Previous studies suggest that the industry exhibits nearly collusive pricing and intense non-price competition. Nevo empirically examines this by estimating price-cost margins and separating them into three sources: product differentiation, multi-product firm pricing, and potential price collusion. The results show that product differentiation and multi-product pricing explain most of the observed price-cost markups. Nevo concludes that prices in the industry are consistent with non-collusive pricing behavior, despite high price-cost margins. Leading firms maintain a portfolio of differentiated products and influence perceived product quality, which contributes to high price-cost margins. Nevo uses a three-dimensional panel of cereal quantities and prices across 25 brands in up to 65 U.S. cities over 20 quarters. The data is collected using scanning devices in a representative sample of supermarkets. The estimation addresses two challenges: the correlation between prices and brand-city-quarter specific demand shocks, and the large number of own- and cross-price elasticities implied by the many products. Nevo uses a discrete-choice model to estimate demand parameters and compute price-cost margins implied by different industry structures. The results suggest that the current industry structure, under a Nash-Bertrand pricing game, matches observed price-cost margins. High price-cost margins are due to consumers' willingness to pay for their favorite brand and firms' pricing decisions considering substitution between their own brands. Market power in the industry is due to firms' ability to maintain a portfolio of differentiated products and influence perceived product quality through advertising. Nevo's analysis shows that the industry's price-cost margins are consistent with non-collusive pricing behavior. The results suggest that the industry's high price-cost margins are not due to a lack of price competition but rather to consumers' willingness to pay for their favorite brand and firms' pricing decisions considering substitution between their own brands. The study highlights the importance of controlling for demographics and heterogeneity in estimating market power. The results also show that the estimated price-cost margins are consistent with the industry's current structure, and that the high margins are due to product differentiation and multi-product pricing, not collusion. The study provides insights into the factors that contribute to market power in the ready-to-eat cereal industry.Aviv Nevo analyzes the ready-to-eat cereal industry to measure market power. The industry is characterized by high concentration, high price-cost margins, large advertising-to-sales ratios, and frequent product introductions. Previous studies suggest that the industry exhibits nearly collusive pricing and intense non-price competition. Nevo empirically examines this by estimating price-cost margins and separating them into three sources: product differentiation, multi-product firm pricing, and potential price collusion. The results show that product differentiation and multi-product pricing explain most of the observed price-cost markups. Nevo concludes that prices in the industry are consistent with non-collusive pricing behavior, despite high price-cost margins. Leading firms maintain a portfolio of differentiated products and influence perceived product quality, which contributes to high price-cost margins. Nevo uses a three-dimensional panel of cereal quantities and prices across 25 brands in up to 65 U.S. cities over 20 quarters. The data is collected using scanning devices in a representative sample of supermarkets. The estimation addresses two challenges: the correlation between prices and brand-city-quarter specific demand shocks, and the large number of own- and cross-price elasticities implied by the many products. Nevo uses a discrete-choice model to estimate demand parameters and compute price-cost margins implied by different industry structures. The results suggest that the current industry structure, under a Nash-Bertrand pricing game, matches observed price-cost margins. High price-cost margins are due to consumers' willingness to pay for their favorite brand and firms' pricing decisions considering substitution between their own brands. Market power in the industry is due to firms' ability to maintain a portfolio of differentiated products and influence perceived product quality through advertising. Nevo's analysis shows that the industry's price-cost margins are consistent with non-collusive pricing behavior. The results suggest that the industry's high price-cost margins are not due to a lack of price competition but rather to consumers' willingness to pay for their favorite brand and firms' pricing decisions considering substitution between their own brands. The study highlights the importance of controlling for demographics and heterogeneity in estimating market power. The results also show that the estimated price-cost margins are consistent with the industry's current structure, and that the high margins are due to product differentiation and multi-product pricing, not collusion. The study provides insights into the factors that contribute to market power in the ready-to-eat cereal industry.