What Makes a Good Merger? An Analysis of Merger Efficiencies in the U.S. Bottled Water Industry

39 Pages Posted: 8 Dec 2018

See all articles by Jun Zhang

Jun Zhang

University of Maryland - Department of Agricultural & Resource Economics

Date Written: November 8, 2018

Abstract

I quantify efficiencies that were created following a horizontal merger between Coca-Cola and Glaceau, the manufacturer of Vitaminwater and Smartwater, in the U.S. premium bottled water market. I estimate a structural demand and supply model where manufacturers choose advertising, product variety (number of UPCs) and wholesale prices, and I allow for several types of efficiencies. With counterfactual simulations, I show how marginal cost, product variety fixed cost, and advertising fixed cost efficiencies affected equilibrium market outcomes. I find that, compared to a "no merger" baseline in year 2009, the merger reduced the prices of Glaceau products by 3.5%-5.2% and increased product varieties by 18.8%-35.8%, advertising of Vitaminwater by 53.9%. Besides, the merger increased market shares of Glaceau products by 40.1%-60.7% and raised consumer surplus by about 22%. These results suggest that, despite a recent focus on mergers that appear to have had negative consequences, some mergers yield benefits.

Keywords: Horizontal Merger, Merger Efficiencies, Non-price Competition, Bottled Water Industry

JEL Classification: L1, L4, L6

Suggested Citation

Zhang, Jun, What Makes a Good Merger? An Analysis of Merger Efficiencies in the U.S. Bottled Water Industry (November 8, 2018). Available at SSRN: https://ssrn.com/abstract=3284249 or http://dx.doi.org/10.2139/ssrn.3284249

Jun Zhang (Contact Author)

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States

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