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The Effect of Advertising on Collusion in the U.S. Brewing Industry: A Trigger Strategy Approach

  • Feng Yao

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    In response to a dramatic reduction in the number of firms and enormous advertising expenditures in the U.S. brewing industry, we explore the effect of advertising cooperativeness on the likelihood of collusion. With advertising and price as strategic variables, we analyze an infinitely repeated symmetric game and model the degree of collusion using the trigger strategy. We find that constructive advertising can decrease the critical discount factor above which collusion is sustainable by trigger strategies and thus can support collusion, while combative advertising is likely to break the collusion. The results may help fill the gap between empirical evidence and theoretical predictions regarding advertising and collusion. We perform an empirical illustration using firm level data from 1950 to 2001 of Anheuser-Busch and Miller, the two largest domestic beer producers. The evidence confirms our conjecture that the U.S. brewing industry exhibits collusion and that the firm advertising, especially that of Miller, is of the constructive type. Copyright International Atlantic Economic Society 2012

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    File URL: http://hdl.handle.net/10.1007/s11293-011-9301-3
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    Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

    Volume (Year): 40 (2012)
    Issue (Month): 1 (March)
    Pages: 21-37

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    Handle: RePEc:kap:atlecj:v:40:y:2012:i:1:p:21-37
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    1. Gasmi, F & Laffont, J J & Vuong, Q, 1992. "Econometric Analysis of Collusive Behavior in a Soft-Drink Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(2), pages 277-311, Summer.
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    4. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
    5. George Symeonidis, 2000. "Cartel stability with multiproduct firms," Economics Discussion Papers 515, University of Essex, Department of Economics.
    6. James W. Friedman, 1983. "Advertising and Oligopolistic Equilibrium," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 464-473, Autumn.
    7. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
    8. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 1-12, January.
    9. Cubbin, John, 1983. "Apparent collusion and conjectural variations in differentiated oligopoly," International Journal of Industrial Organization, Elsevier, vol. 1(2), pages 155-163, June.
    10. Abreu, Dilip & Pearce, David & Stacchetti, Ennio, 1986. "Optimal cartel equilibria with imperfect monitoring," Journal of Economic Theory, Elsevier, vol. 39(1), pages 251-269, June.
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