Estimating Complementarity With Large Choice Sets: An Application to Mergers

109 Pages Posted: 11 Mar 2021 Last revised: 26 Apr 2024

See all articles by Daniel Ershov

Daniel Ershov

UCL School of Management; Centre for Economic Policy Research (CEPR)

Jean-William Laliberté

University of Calgary - Department of Economics

Mathieu Marcoux

University of Montreal

Scott Orr

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

Date Written: April 24, 2024

Abstract

Standard discrete choice demand models assume that all products are substitutes. Merger analyses based on these models may overstate consumer harm. We develop an estimator that identifies demand complementarity and remains computationally feasible with large choice sets. We apply this estimator to the chips and soda market and find a high degree of complementarity between these product groups. We show that a counterfactual merger ignoring complementarity between PepsiCo/Frito-Lay and Dr. Pepper generates price increases for soda that are 33% larger than a model with complementarity, and that post-merger chip prices decrease when accounting for complementarity.

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 Marcoux, Mathieu and Orr, Scott, Estimating Complementarity With Large Choice Sets: An Application to Mergers (April 24, 2024). Available at SSRN: https://ssrn.com/abstract=3802097 or http://dx.doi.org/10.2139/ssrn.3802097

Daniel Ershov

UCL School of Management ( email )

One Canada Square
London, E14 5AA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jean-William P. Laliberté

University of Calgary - Department of Economics ( email )

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

Mathieu Marcoux

University of Montreal ( email )

C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7
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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