This paper examines the market power in the ready-to-eat (RTE) cereal industry, characterized by high concentration, price-cost margins, large advertising-to-sales ratios, and frequent new product introductions. The author, Aviv Nevo, estimates price-cost margins and separates them into three sources: product differentiation, multi-product firm pricing, and potential price collusion. The results suggest that the first two sources explain most of the observed price-cost markups, indicating non-collusive pricing behavior despite high margins. Leading firms maintain a portfolio of differentiated products and influence perceived product quality, leading to high price-cost margins. The study uses a discrete-choice model to estimate demand parameters and compares different supply models to determine the best fit for observed price-cost margins. The findings support the conclusion that the industry's pricing behavior is non-collusive, with high margins driven by consumer willingness to pay for brand differentiation and firms' strategic pricing decisions.This paper examines the market power in the ready-to-eat (RTE) cereal industry, characterized by high concentration, price-cost margins, large advertising-to-sales ratios, and frequent new product introductions. The author, Aviv Nevo, estimates price-cost margins and separates them into three sources: product differentiation, multi-product firm pricing, and potential price collusion. The results suggest that the first two sources explain most of the observed price-cost markups, indicating non-collusive pricing behavior despite high margins. Leading firms maintain a portfolio of differentiated products and influence perceived product quality, leading to high price-cost margins. The study uses a discrete-choice model to estimate demand parameters and compares different supply models to determine the best fit for observed price-cost margins. The findings support the conclusion that the industry's pricing behavior is non-collusive, with high margins driven by consumer willingness to pay for brand differentiation and firms' strategic pricing decisions.