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Mergers when Firms Compete by Choosing both Price and Promotion

43 Pages Posted: 18 Apr 2007  

Luke Froeb

Vanderbilt University - Strategy and Business Economics

Steven Tenn

Charles River Associates

Steven Tschantz

Vanderbilt University - Department of Mathematics

Date Written: April 11, 2007

Abstract

Enforcement agencies have a relatively good understanding of how to measure the loss of price competition caused by merger. However, when firms compete in multiple dimensions, merger effects are not well understood. In this paper, we study mergers in industries where firms compete by setting both price and promotion, and ask what happens if we mistakenly assume that price is the only dimension of competition. To answer the question, we build a structural model of the super-premium ice cream industry, where a 2003 merger between Häagen-Dazs and Dreyer's was challenged by the Federal Trade Commission. A structural merger model that ignores promotional competition under-predicts the price effects of a merger in this industry (5% instead of 12%). About three-fourths of the difference can be attributed to estimation bias (estimated demand is too elastic), with the remainder due to extrapolation bias from assuming post-merger promotional activity stays constant (instead it declines by 31%).

Keywords: merger, antitrust, FTC, ice cream, promotion, competition, scanner data

Suggested Citation

Froeb, Luke and Tenn, Steven and Tschantz, Steven, Mergers when Firms Compete by Choosing both Price and Promotion (April 11, 2007). Vanderbilt Public Law Research Paper No. 07-09; Vanderbilt Law and Economics Research Paper No. 07-11. Available at SSRN: https://ssrn.com/abstract=980941 or http://dx.doi.org/10.2139/ssrn.980941

Luke M. Froeb (Contact Author)

Vanderbilt University - Strategy and Business Economics ( email )

Nashville, TN 37203
United States
615-322-9057 (Phone)
615-343-7177 (Fax)

Steven Tenn

Charles River Associates ( email )

1201 F Street, NW, Suite 700
Washington, DC 20004-1229
United States
202-662-3806 (Phone)
202-662-3910 (Fax)

Steven T. Tschantz

Vanderbilt University - Department of Mathematics ( email )

Nashville, TN 37240
United States

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