Oligopolistic Price Leadership and Mergers: The United States Beer Industry

Abstract

We study a repeated game of oligopolistic price leadership in which one firm, the leader, proposes market-specific supermarkups over Bertrand prices to a coalition of rivals. Supermarkups and the firms' marginal costs can be recovered from scanner data on prices and quantities using the structure of the model. In an application to the beer industry, we find that price leadership increases profit relative to Bertrand competition by 17% in fiscal years 2006 and 2007, and by 22% in 2010 and 2011, with the change mostly due to consolidation. We use counterfactual simulations to examine two mergers, and find that they relax binding incentive compatibility constraints and increase supermarkups, to the detriment of consumers. These coordinated effects arise even with efficiencies sufficient to offset price increases under Bertrand competition.

Keywords: price leadership, coordinated effects, mergers

JEL Classification: K21, L13, L41, L66