An Empirical Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry

40 Pages Posted: 18 Nov 2010

See all articles by Vivienne Pham

Vivienne Pham

La Trobe University - School of Economics and Finance

David Prentice

Infrastructure Victoria

Date Written: November 15, 2010

Abstract

In this paper we empirically analyse two counterfactual situations facing an anti-trust authority following the merger of two of the largest international cigarette companies. First we estimate a nested logit model of demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are both broadly consistent with the limited independent estimates available. We then use the model to simulate the proposed merger and the partial divestiture that was accepted by the Australian anti-trust authority. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows the model successfully anticipated the behaviour of the divested brands. This suggests structural econometric analysis using a nested logit may be usefully utilised by anti-trust authorities to assess the welfare implications of proposed mergers and partial divestitures.

Keywords: mergers, divestitures, cigarettes, tobacco, anti-trust policy, competition policy

Suggested Citation

Pham, Vivienne and Prentice, David, An Empirical Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry (November 15, 2010). Available at SSRN: https://ssrn.com/abstract=1709179 or http://dx.doi.org/10.2139/ssrn.1709179

Vivienne Pham

La Trobe University - School of Economics and Finance ( email )

Bundoora
Melbourne, 3086
Australia

David Prentice (Contact Author)

Infrastructure Victoria ( email )

530 Collins St
Melbourne, 3000
Australia

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