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An empirical analysis of the counterfactual: a merger and divestiture in the Australian cigarette industry

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  • Pham, Vivienne
  • Prentice, David

Abstract

In this paper we empirically analyse two counterfactual situations facing an anti-trust authority following the merger of two of the largest international cigarette companies. First we estimate a nested logit model of demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are both broadly consistent with the limited independent estimates available. We then use the model to simulate the proposed merger and the partial divestiture that was accepted by the Australian anti-trust authority. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows the model successfully anticipated the behaviour of the divested brands. This suggests structural econometric analysis using a nested logit may be usefully utilised by anti-trust authorities to assess the welfare implications of proposed mergers and partial divestitures.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26713.

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Date of creation: 15 Nov 2010
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Handle: RePEc:pra:mprapa:26713

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Keywords: mergers; divestitures; simulation; cigarettes; anti-trust policy; competition policy;

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Cited by:
  1. Ying, Xiongwei & Anders, Sven M., 2013. "Competition between Private Label and National Brand for Health-differentiated Food Product: A Canadian Retailing Case," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151280, Agricultural and Applied Economics Association.
  2. Harry Clarke & David Prentice, 2012. "Will Plain Packaging Reduce Cigarette Consumption?," Working Papers 2012.03, School of Economics, La Trobe University.
  3. Vivienne Pham & David Prentice, 2013. "A Random Coefficients Logit Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry," Working Papers 2013.04, School of Economics, La Trobe University.

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