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Mergers with Differentiated Products: The Case of Ready-to-Eat Cereal

Author

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  • Aviv Nevo

    (Economics Department, University of California)

Abstract

Traditional merger analysis, based on market definition and use of concentration measures to infer potential anti-competitive effects, is problematic and difficult to implement when evaluating mergers in industries with differentiated products. This paper discusses an alternative which consists of a front-end estimation of demand and back-end use of a model of post-merger conduct to simulate the competitive effects of a merger. I discuss and demonstrate the use of different methods of estimating demand. Furthermore, I show how the estimated demand parameters can be used to compute the post-merger price equilibrium (rather than just an approximation to it) and changes in welfare. The methodology is applied to two recent mergers and two hypothetical mergers in the ready-to-eat cereal industry. The results clearly demonstrate the importance of the model used in front-end estimation and the computation of equilibrium in determining the competitive effects of a merger.

Suggested Citation

  • Aviv Nevo, 2003. "Mergers with Differentiated Products: The Case of Ready-to-Eat Cereal," Finance 0303004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0303004
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    1. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    2. W. Ross Morrow & Steven J. Skerlos, 2011. "Fixed-Point Approaches to Computing Bertrand-Nash Equilibrium Prices Under Mixed-Logit Demand," Operations Research, INFORMS, vol. 59(2), pages 328-345, April.
    3. Evelyn Vezza, 2004. "Poder de Mercado en las Profesiones Autorreguladas: El Desempeño Médico en Argentina," IIE, Working Papers 056, IIE, Universidad Nacional de La Plata.
    4. Gaynor, Martin & Vogt, William B, 2003. "Competition among Hospitals," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 764-785, Winter.
    5. Evelyn Vezza, 2004. "Poder de Mercado en las Profesiones Autorreguladas: El Desempeño Médico en Argentina," Department of Economics, Working Papers 056, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
    6. Christopher R. Knittel & Konstantinos Metaxoglou, 2008. "Estimation of Random Coefficient Demand Models: Challenges, Difficulties and Warnings," NBER Working Papers 14080, National Bureau of Economic Research, Inc.
    7. Evelyn Vezza, 2004. "Poder de Mercado en las Profesiones Autorreguladas: El Desempeño Médico en Argentina," CEDLAS, Working Papers 0016, CEDLAS, Universidad Nacional de La Plata.
    8. Leheyda, Nina, 2008. "Market Power, Multimarket Contact and Pricing: Some Evidence from the US Automobile Market," ZEW Discussion Papers 08-118, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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