A Random Coefficients Logit Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry

50 Pages Posted: 30 Jun 2013

See all articles by Vivienne Pham

Vivienne Pham

La Trobe University - School of Economics and Finance

David Prentice

Infrastructure Victoria

Date Written: June 29, 2013

Abstract

In this paper we empirically analyse two counterfactual situations facing an antitrust authority following the merger of two of the largest international cigarette companies. First we estimate a random coefficients model of the demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are consistent with the independent estimates available. We then use the model to simulate the proposed merger and the partial divestiture that was accepted by the Australian antitrust authority. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows that the model is partially successful in predicting the ranking of price changes across companies following the divestiture. This suggests structural econometric analysis using a random coefficients model can provide information for antitrust authorities assessing the implications of a potential merger and partial divestiture.

Keywords: Mergers, Divestitures, Random-coefficient Logit, Cigarettes

JEL Classification: L41, L66

Suggested Citation

Pham, Vivienne and Prentice, David, A Random Coefficients Logit Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry (June 29, 2013). Available at SSRN: https://ssrn.com/abstract=2287327 or http://dx.doi.org/10.2139/ssrn.2287327

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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