Product Differentiation and Mergers in the Carbonated Soft Drink Industry

Abstract

I simulate the competitive impact of several soft drink mergers from the 1980s on equilibrium prices and quantities. An unusual feature of soft drink demand is that, at the individual purchase level, households regularly select a variety of soft drink products. Specifically, on a given trip households may select multiple soft drink products and multiple units of each. A concern is that using a standard discrete choice model that assumes single unit purchases may understate the price elasticity of demand. To model the sophisticated choice behavior generating this multiple discreteness, I use household-level scanner data set. Market demand is then computed by aggregating the household estimates. Combining the aggregate demand estimates with a model of static oligopoly, I then run the merger simulations. Consistent with the arguments of Coca-Cola, we find that only the merger between Coca-Cola and Pepsi leads to substantial price increases and corresponding welfare losses.

Keywords: mergers, demand estimation, multiple-discreteness, structural modeling

JEL Classification: L15, C5, D4