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An empirical Analysis of the Counter-factual: A Merger and Divestiture in the Australian Cigarette Industry

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  • Vivienne Pham

    (School of Economics, La Trobe University)

  • David Prentice

    ()
    (School of Economics, La Trobe University)

Abstract

In this paper we empirically analyse two counter-factual 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 School of Economics, La Trobe University in its series Working Papers with number 2010.08.

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Length: 40 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:trb:wpaper:2010.08

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Cited by:
  1. Harry Clarke & David Prentice, 2012. "Will Plain Packaging Reduce Cigarette Consumption?," Economic Papers, The Economic Society of Australia, vol. 31(3), pages 303-317, 09.
  2. 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.
  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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