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Mergers when firms compete by choosing both price and promotion

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Author Info

  • Tenn, Steven
  • Froeb, Luke
  • Tschantz, Steven

Abstract

We analyze the bias from predicting merger effects using structural models of price competition when firms actually compete using both price and promotion. We extend the standard merger simulation framework to allow for competition over both price and promotion and ask what happens if we ignore promotional competition. This model is applied to the super-premium ice cream industry, where a merger between Nestlé and Dreyer's was challenged by the Federal Trade Commission. We find that ignoring promotional competition significantly biases the predicted price effects of a merger to monopoly (5% instead of 12%). About three-fourths of the difference can be attributed to estimation bias (estimated demand is too elastic), with the remainder due to extrapolation bias from assuming post-merger promotional activity stays constant (instead it declines by 31%).

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 28 (2010)
Issue (Month): 6 (November)
Pages: 695-707

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Handle: RePEc:eee:indorg:v:28:y:2010:i:6:p:695-707

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Web page: http://www.elsevier.com/locate/inca/505551

Related research

Keywords: Merger analysis Structural oligopoly model Promotion;

References

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  1. Pradeep Chintagunta & Jean-Pierre Dubé & Vishal Singh, 2003. "Balancing Profitability and Customer Welfare in a Supermarket Chain," Quantitative Marketing and Economics, Springer, vol. 1(1), pages 111-147, March.
  2. Gregory Werden, 2000. "Expert Report in United States v. Interstate Bakeries Corp. and Continental Baking Co," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(2), pages 139-148.
  3. Werden, Gregory J, 1996. "A Robust Test for Consumer Welfare Enhancing Mergers among Sellers of Differentiated Products," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 409-13, December.
  4. Werden, G.J., 1996. "A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products," Papers 96-01, U.S. Department of Justice - Antitrust Division.
  5. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2007. "Estimating Dynamic Models of Imperfect Competition," Econometrica, Econometric Society, vol. 75(5), pages 1331-1370, 09.
  6. Philip Crooke & Luke Froeb & Steven Tschantz & Gregory Werden, 1999. "Effects of Assumed Demand Form on Simulated Postmerger Equilibria," Review of Industrial Organization, Springer, vol. 15(3), pages 205-217, November.
  7. Jerry HAUSMAN & Gregory LEONARD & J. Douglas ZONA, 1994. "Competitive Analysis with Differentiated Products," Annales d'Economie et de Statistique, ENSAE, issue 34, pages 159-180.
  8. Dae-Wook Kim & Christopher R. Knittel, 2006. "BIASES IN STATIC OLIGOPOLY MODELS? EVIDENCE FROM THE CALIFORNIA ELECTRICITY MARKET -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(4), pages 451-470, December.
  9. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
  10. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  11. Steven Tenn, 2006. "Avoiding aggregation bias in demand estimation: A multivariate promotional disaggregation approach," Quantitative Marketing and Economics, Springer, vol. 4(4), pages 383-405, December.
  12. Igal Hendel & Aviv Nevo, 2006. "Measuring the Implications of Sales and Consumer Inventory Behavior," Econometrica, Econometric Society, vol. 74(6), pages 1637-1673, November.
  13. Pinkse, Joris & Slade, Margaret E., 2004. "Mergers, brand competition, and the price of a pint," European Economic Review, Elsevier, vol. 48(3), pages 617-643, June.
  14. Werden, Gregory J & Froeb, Luke M, 1994. "The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 407-26, October.
  15. Peters, Craig, 2006. "Evaluating the Performance of Merger Simulation: Evidence from the U.S. Airline Industry," Journal of Law and Economics, University of Chicago Press, vol. 49(2), pages 627-49, October.
  16. Froeb, Luke & Tschantz, Steven & Crooke, Philip, 2003. "Bertrand competition with capacity constraints: mergers among parking lots," Journal of Econometrics, Elsevier, vol. 113(1), pages 49-67, March.
  17. Michaela Draganska & Dipak C. Jain, 2005. "Product-Line Length as a Competitive Tool," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 1-28, 03.
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  20. Aguirregabiria, Victor, 1999. "The Dynamics of Markups and Inventories in Retailing Firms," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 275-308, April.
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Citations

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Cited by:
  1. Crawford, Gregory S., 2012. "Endogenous product choice: A progress report," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 315-320.
  2. Luke Froeb & Daniel Hosken & Janis Pappalardo, 2004. "Economics Research at the FTC: Information, Retrospectives, and Retailing," Review of Industrial Organization, Springer, vol. 25(4), pages 353-374, October.
  3. Oliver Budzinski, 2009. "Modern Industrial Economics and Competition Policy: Open Problems and Possible Limits," Working Papers 93/09, University of Southern Denmark, Department of Environmental and Business Economics.
  4. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2014. "Horizontal Mergers and Product Quality," NIPE Working Papers 07/2014, NIPE - Universidade do Minho.
  5. Oliver Budzinski, 2010. "An Institutional Analysis of the Enforcement Problems in Merger Control," Working Papers 101/10, University of Southern Denmark, Department of Environmental and Business Economics.
  6. Budzinski, Oliver, 2012. "Empirische Ex-Post Evaluation von wettbewerbspolitischen Entscheidungen: Methodische Anmerkungen," Ilmenau Economics Discussion Papers 69, Ilmenau University of Technology, Institute of Economics.
  7. Michael Cohen & Adam Rabinowitz, 2012. "An Empirical Analysis of Equilibrium Pricing and Advertising in the Ready-To-Eat Cereal Market," Working Papers 15, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.

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