Mergers with Endogenous Product Choice: The Case of the Ready-to-Eat Cereal Industry
51 Pages Posted: 25 Nov 2020
Date Written: October 5, 2020
The analysis of mergers in industries with differentiated products has traditionally focused its attention on post-merger price changes, ignoring the effect of a new competitive landscape on the characteristics of the products firms choose to offer. We propose a new analysis, which includes the product entry and assortment decision of multi-product firms, and simulates the competitive effects of a merger both in terms of changes to prices and to products offered. Using supermarket scanner data and historic information on products introduced and scrapped, we estimate a dynamic structural model of product entry and pricing, which we use 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, we 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 we show provides similar results to the random-coefficient logit model previously estimated on the same data. The results show that allowing firms to change product entry and assortment in addition to prices leads in most cases to a further loss in consumer welfare due to a lower incentive of merging firms to introduce new products. The additional loss can be as high as 50% of the welfare loss predicted by traditional pricing analysis.
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