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Does the King Use Its Power? Price Competition in U.S. Brewing

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  • Rojas, Christian
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    Abstract

    Pricing behavior of firms in differentiated product markets has been studied intensely in recent empirical work. Despite several accounts in various industries, price leadership has remained mostly unassessed. This study analyzes price competition in the U.S. brewing industry with a focus on price leadership by the largest U.S. beer producer Anheuser-Busch and its heavily marketed "King of Beers" brand Budweiser. This paper employs a unique nationwide data set on brand-level sales collected before and after a 100% increase in the federal excise tax on beer. Brand-level demand estimates are combined with several supply models, including several price leadership scenarios, to simulate prices that would have prevailed under each model after the tax increase. These "predicted" prices are then compared to "actual" prices after the tax increase to determine the fit of the different supply models. While Bertrand-Nash behavior appears to be a more suitable model of price competition, it tends to under-predict price increases of more price-elastic brands and to over-predict price increases of less price-elastic brands. In particular, the predicted price of Budweiser is much larger than its actual value. An interpretation of this result is that Anheuser-Busch could exert more market power through its flagship brand than it actually does. Overall, actual price movements as a result of the tax increase tend to be more similar across brands than predicted by any of the models considered. While this pattern is not inconsistent with leadership behavior, leadership models considered in this paper do not conform with this pattern.

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    Bibliographic Info

    Paper provided by University of Connecticut, Food Marketing Policy Center in its series Research Reports with number 25172.

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    Date of creation: 2005
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    Handle: RePEc:ags:uconnr:25172

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    Keywords: Agribusiness; Demand and Price Analysis; Industrial Organization;

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    1. Kadiyali, Vrinda & Vilcassim, Naufel J & Chintagunta, Pradeep K, 1996. "Empirical Analysis of Competitive Product Line Pricing Decisions: Lead, Follow, or Move Together?," The Journal of Business, University of Chicago Press, vol. 69(4), pages 459-87, October.
    2. Simon P. Anderson & Andre de Palma & Brent Kreider, 2000. "Tax Incidence in Differentiated Product Oligopoly," Virginia Economics Online Papers 341, University of Virginia, Department of Economics.
    3. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
    4. Gasmi, Farid & Laffont, Jean-Jacques & Vuong, Quang, 1992. "Econometric Analysis of Collusive Behavior in a Soft Drink Market," IDEI Working Papers 16, Institut d'Économie Industrielle (IDEI), Toulouse.
    5. Moschini, GianCarlo, 1995. "Units of Measurement and the 'Stone Index' In Demand System Estimation," Staff General Research Papers 5058, Iowa State University, Department of Economics.
    6. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
    7. Joris Pinkse & Margaret E. Slade & Craig Brett, 2002. "Spatial Price Competition: A Semiparametric Approach," Econometrica, Econometric Society, vol. 70(3), pages 1111-1153, May.
    8. Rotemberg, Julio J & Saloner, Garth, 1990. "Collusive Price Leadership," Journal of Industrial Economics, Wiley Blackwell, vol. 39(1), pages 93-111, September.
    9. Slade, Margaret E, 1995. "Product Rivalry with Multiple Strategic Weapons: An Analysis of Price and Advertising Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 445-76, Fall.
    10. Jerry A. Hausman, 1994. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Working Papers 4970, National Bureau of Economic Research, Inc.
    11. 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.
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