nach oben

Quantitative Marketing and Economics

Erschienen in:

13.01.2023

Mergers with endogenous product choice: The case of the ready-to-eat cereal industry

verfasst von: Federico Rossi

Erschienen in: Quantitative Marketing and Economics | Ausgabe 1/2023

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

The analysis of mergers in industries with differentiated products has traditionally focused its attention on postmerger price changes, ignoring the effect of a new competitive landscape on the characteristics of the products firms choose to offer. This paper proposes a new analysis, which includes the product entry and assortment decisions of firms, and shows how quickly product entry in an industry offsets – or its slowdown exacerbates—the anticompetitive effect on prices of a merger. Using supermarket scanner data and historic information on product introduction in the ready-to-eat cereal market, I estimate a dynamic oligopoly model of product entry and pricing, which is used to simulate firms’ post-merger behavior and compute welfare effects. While solving the dynamic model is nearly unfeasible, due to the large number of products in the market, I recast the model using a different state space that significantly reduces the number of variables required. This approach implies using a nested logit model demand system, which I show provides similar results to the random-coefficient logit model previously estimated on the same data. The results show that, within three years from a merger, a reduction in the number of products offered has further increased the anticompetitive effects, due to product culling, and to a lower incentive of merging firms to introduce new products. Cost efficiency following from the merger may take several years to offset these effects. Moreover, if achieved gradually over time, it may require a much larger cost reduction.

Nächster Artikel Store expensiveness and consumer saving: Insights from a new decomposition of price dispersion

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

Based on the number of new products introduced in the period between 1975 and 1995.

I thank Valentina Granci at Mondelez International, for helpful conversations about costs firms generally face when introducing new CPGs.

Products for which I only observe the first quarters after entry, or the last quarters before exit are excluded from this count.

A similar pattern is found in Hitsch (2006, page 30).

Similarly, in the data I do not find any instance of products introduced in one location and later moved to another location.

Firms know the distribution of costs, and only observe current cost shocks, but not future ones. See Sections 3.3.2 and 3.3.3 for details.

See Section 2 for a discussion of the difference between entry and assortment costs in this industry.

See Table VI in Nevo (2001).

See Cardell (1997).

This specification means that I am going to rescale the variance of the shock. Notice that, differently from other cases (e.g. random utility models), where the choice-specific payoffs (utilities) are not observed, in this setup I do measure the levels of payoffs associated with each alternative, so the variance of the shock is identified. A similar specification is also found, for example, in Sweeting (2013). I discuss the identification of the scale parameter λ in Section 6.5.

Also, in the data used to estimate this cost, I do not observe enough firm-location decisions to be able to (nonparametrically) estimate the cost parameters in each location.

The assumptions on private information have the consequence of reducing the flexibility of the shocks, thus their interpretation in the model. They can be relaxed at the cost of a higher computational burden.

This implies making the assumption of existence and uniqueness. Doraszelski and Satterthwaite (2010) examine the existence of MPNE in dynamic oligopoly games with incomplete information. After considering an arbitrarily fine discretization of the continuous state space to convert my state variables into discrete ones, my model falls into the category of models they analyze. Regarding uniqueness, multiple equilibria might exist in my model, but the estimates are relatively unaffected, as the estimation search converges consistently to very similar choice probabilities given initial perturbations.

Because of the Markovian assumption, I can drop the period notation and simply denote the next period state variables with \(\{ \mathcal {S}^{\prime },\nu ^{\prime }_{f} \}\).

For this reason, the description of the data and the industry background is intentionally brief.

A similar approach has also been followed by Ippolito and Mathios (1990).

I thank the Kilts Center, University of Chicago Booth School of Business, for making this dataset available.

I suppress the time index t, to simplify notation.

Note that no condition is necessary on unobserved quality (ξ) or marginal costs (mc), since they are included in the formula of the product AIV.

Each variable is the median across a sample of individuals from the Current Population Survey in a given market. Household income is logarithmically transformed.

I run sensitivity checks on the number of grid points and on their values, and on the number of nodes. Results are discussed in Section 7.3, and reported in Appendix F.

The list of these products and their AIV estimates are reported later in Table 7.

See Nevo (2001), Figure 2, page 329.

See Nevo (2001), Table VI, page 327.

This transformation is conditional on a given product assortment. I set the product assortment observed in the last quarter of 1992. This is also the period used in the merger analysis by Nevo (2000).

Given the quarterly discount factor of 0.975 this period is long enough to approximate the infinite horizon.

To insure equilibrium existence and uniqueness at this stage, I assume firms move sequentially, from the largest to the smallest.

Changes in starting values and firms’ move order do not affect the computation of new functions, suggesting that the presence of multiple equilibria, even if plausible, does not seem to affect the counterfactual results.

For the purpose of comparison, I include in the analysis the same products used by Nevo (2000).

The analysis of these decisions over time is instead presented in the next section.

While my model cannot simulate the case where the merging firm can delay product withdrawal, by simulating scenarios where the company’s assortment cost is reduced, I am allowing the firm to include more products in its assortment, thus approximating the effect of delaying product withdrawal on consumer welfare.

To extract the exact percentages from Table 14, I use (spline) interpolation.

A similar analysis for cost efficiency in marginal costs and entry costs is provided in Appendix G.

For an exogenous measure of price, I use prices predicted from first stage.

Aguirregabiria, V., & Mira, P. (2007). Sequential estimation of dynamic discrete games. Econometrica, 75(1), 1–53.CrossRef

Atalay, E., Sorensen, A., Sullivan, C., & Zhu, W. (2020). Post-merger product repositioning: an empirical analysis. Mimeo.

Benkard, C. L., Bodoh-Creed, A., & Lazarev, J. (2019). Simulating the dynamic effects of horizontal mergers: U.S. airlines. Discussion Paper, Stanford University.

Berry, S. T. (1994). Estimating discrete-choice models of product differentiation. RAND, 25(2), 242–262.CrossRef

Berry, S. T., Levinsohn, J., & Pakes, A. (1995). Automobile prices in market equilibrium. Econometrica, 63(4), 841–890.CrossRef

Berry, S. T., & Waldfogel, J. (2001). Do mergers increase product variety? Evidence from radio broadcasting. Quarterly Journal of Economics, 116, 1009–1025.CrossRef

Bresnahan, T. F. (1987). Competition and collusion in the american automobile market: the 1955 price war. Journal of Industrial Economics, 35(4), 457–482.CrossRef

Bresnahan, T. F., & Reiss, P. C. (1991). Entry and competition in concentrated markets. Journal of Political Economy, 99(5), 977–1009.CrossRef

Bresnahan, T.F., Stern, S, & Trajtenberg, M (1997). Market segmentation and the sources of rents for innovation: personal computers in the late 1980s. The RAND Journal of Economics, 28, S17–S44.CrossRef

Cardell, N. S. (1997). Variance components structures for the extreme value and logistic distributions. Econometric Theory, 13(2), 185–213.CrossRef

Doraszelski, U., & Satterthwaite, M. A. (2010). Computable Markov-perfect industry dynamics. The RAND Journal of Economics.

Draganska, M., Mazzeo, M. J., & Seim, K. (2009). Beyond plain vanilla: modeling joint product assortment and pricing decisions. Quantitative Marketing and Economics, 7, 105–146.CrossRef

Ericson, R., & Pakes, A. (1995). Markov-perfect industry dynamics: a framework for empirical work. The Review of Economic Studies, 62(1), 53–82.CrossRef

Fan, Y. (2013). Ownership consolidation and product characteristics: a study of the U.S. daily newspaper market. American Economic Review, 103(5), 1598–1628.CrossRef

Fan, Y., & Yang, C. (2021). Merger, product variety and firm entry: the retail craft beer market in California. mimeo University of Michigan.

Gandhi, A, & Houde, J-F. (2020). Measuring substitution patterns in differentiated-products industries, working paper, Univ. of Pennsylvania.

Gitlin, M., & Ellis, T. (2005). Milking that crazy cow. A century of cereals. Lulu.

Gowrisankaran, G. (1999). A dynamic model of endogenous horizontal mergers. The RAND Journal of Economics, 30, 56–83.CrossRef

Gowrisankaran, G. (2012). Dynamics of consumer demand for new durable goods. Journal of Political Economy, 120(6), 1173–1219.CrossRef

Hendel, I., & Nevo, A. (2006). Measuring the implication of sales and consumer stockpiling behavior. Econometrica, 74(6), 1637–1673.CrossRef

Hitsch, G. (2006). An empirical model of optimal dynamic product launch and exit under demand uncertainty. Marketing Science, 25(1), 25–50.CrossRef

Hotz, J. V., & Miller, R. A. (1993). Conditional choice probabilities and the estimation of dynamic models. The Review of Economic Studies, 60(3), 497–529.CrossRef

Ippolito, P. M., & Mathios, A. D. (1990). Information, advertising and health choices: a study of the cereal market. The RAND Journal of Economics, 21(3), 459–480.CrossRef

Jeziorski, P. (2015). Empirical model of dynamic merger enforcement—choosing ownership caps U.S. radio. mimeo, University of Berkeley.

Li, S., Mazur, J., Park, Y., Roberts, J., Sweeting, A., & Zhang, J. (2021). Repositioning and market power after airline mergers. The RAND Journal of Economics, forthcoming.

Maskin, E., & Tirole, J. (1988). A theory of dynamic oligopoly: I & ii. 56(3), 549–600.

Mazzeo, M. J. (2002). Product choice oligopoly and oligopoly market structure. The RAND Journal of Economics, 33(2), 1–22.CrossRef

Mazzeo, M. J., Seim, K., & Varela, M. (2018). The welfare consequences of mergers with endogenous product choice. Journal of Industrial Economics, 66(4), 980–1016.CrossRef

McFadden, D. L. (1978). Modeling the choice of residential location. In A. Karlqvist, F. Snickars, & J. Weibull (Eds.) Spatial interaction theory and planning models (pp. 75–96). North Holland.

Melnikov, O. (2013). Demand for differentiated durable products: the case of U.S. computer printer market. Economic Inquiry, 51(2), 1277–1298.CrossRef

Nevo, A. (2000). Mergers with differentiated products: the case of the ready-to-eat cereal industry. The RAND Journal of Economics, 31(3), 395–421.CrossRef

Nevo, A. (2001). Measuring market power in ready-to-eat cereal industry. Econometrica, 69(2), 307–342.CrossRef

Nevo, A., & Rossi, F. (2008). An approach for extending dynamic models to settings with multi-product firms. Economics Letters, 100, 49–52.CrossRef

Schmalensee, R. (1978). Entry deterrence in the ready-to-eat breakfast cereal industry. Bell Journal of Economics, 9, 305–327.CrossRef

Seim, K. (2006). An empirical model of firm entry with endogenous product–type choices. The RAND Journal of Economics, 37(3), 619–640.CrossRef

Sweeting, A. (2010). The effects of mergers on product positioning: evidence from the music radio industry. The RAND Journal of Economics, 41(2), 372–397.CrossRef

Sweeting, A. (2013). Dynamic product positioning in differentiated product industries: the effect of fees for musical performance rights on the commercial radio industry. Econometrica, 81(5), 1763– 1803.CrossRef

Wollmann, T. G. (2018). Trucks without bailouts: equilibrium product characteristics for commercial vehicles. American Economic Review, 108 (6), 1364–1406.CrossRef

Titel: Mergers with endogenous product choice: The case of the ready-to-eat cereal industry
verfasst von: Federico Rossi
Publikationsdatum: 13.01.2023
Verlag: Springer US
Erschienen in: Quantitative Marketing and Economics / Ausgabe 1/2023
Print ISSN: 1570-7156
Elektronische ISSN: 1573-711X
DOI: https://doi.org/10.1007/s11129-022-09259-0