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

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  • Feng Yao

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Abstract

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

Suggested Citation

  • Feng Yao, 2012. "The Effect of Advertising on Collusion in the U.S. Brewing Industry: A Trigger Strategy Approach," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 40(1), pages 21-37, March.
  • Handle: RePEc:kap:atlecj:v:40:y:2012:i:1:p:21-37
    DOI: 10.1007/s11293-011-9301-3
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    File URL: http://hdl.handle.net/10.1007/s11293-011-9301-3
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    Cited by:

    1. Maier, Tomas, 2012. "Modelling Brewing Industry Pricing," AGRIS on-line Papers in Economics and Informatics, Czech University of Life Sciences Prague, Faculty of Economics and Management, vol. 4(4), December.

    More about this item

    Keywords

    Advertising; Collusion; Trigger strategy; Brewing industry; L11; L13; L66;

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco

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