Mergers in a Model with Complementarity

51 Pages Posted: 26 Dec 2018

See all articles by Daniel Ershov

Daniel Ershov

University of Toulouse 1 - Toulouse School of Economics (TSE)

Jean-William Laliberté

University of Calgary - Department of Economics

Scott Orr

University of British Columbia (UBC) - Division of Strategy and Business Economics

Date Written: December 3, 2018

Abstract

Standard discrete choice models used to evaluate mergers assume that different product varieties are substitutes. However, legal defences in some recent high-profile mergers rested on demand complementarity (e.g., GE/Honeywell). Since complements tend to be priced lower by a monopolist than by a duopoly, standard models will overstate consumer harm in these mergers. We use consumer level data from Nielsen to look at two products with natural demand complementarities and a history of regulatory activity - potato chips and carbonated soda pop. We estimate a discrete choice model that allows for demand complementarity across pop and chips, using a novel estimator that leverages information on bundle specific purchases from consumer micro data, as well as aggregate scanner data. We then simulate a number of anti-trust counterfactuals in the chips and carbonated soda market. Once demand complementarity is taken into account, a merger between the chips and soda producer PepsiCo/Frito-Lay and the soda producer Dr. Pepper will reduce chip prices. Soda prices will either increase or fall, depending on the market. By contrast, the standard discrete choice model predicts that soda prices would always increase following the merger. An additional counterfactual breaking up the PepsiCo/Frito-Lay conglomerate suggests that both chip and soda prices will increase as a result.

Keywords: Demand Complementarity, Demand Estimation, Discrete Choice Models, Mergers

JEL Classification: D22, D43, G34, L13, L40, L66

Suggested Citation

Ershov, Daniel and P. Laliberté, Jean-William and Orr, Scott, Mergers in a Model with Complementarity (December 3, 2018). Available at SSRN: https://ssrn.com/abstract=3295232 or http://dx.doi.org/10.2139/ssrn.3295232

Daniel Ershov

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Jean-William P. Laliberté

University of Calgary - Department of Economics ( email )

2500 University Dr. N.W.
Calgary, Albetra T2N 1N4
Canada

Scott Orr (Contact Author)

University of British Columbia (UBC) - Division of Strategy and Business Economics ( email )

2053 Main Mall
Vancouver, British Columbia
Canada

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