Monday, April 30, 2007
Posted by D. Daniel Sokol
A new paper, Mergers when Firms Compete by Choosing both Price and Promotion, by Luke Froeb of Owen Graduate School of Management of Vanderbilt University, Steven Tenn of the Federal Trade Commission and Steven Tschantz of the Department of Mathematics of Vanderbilt University analyzes the merger effects in the 2003 merger between Häagen-Dazs and Dreyer that the FTC challenged.
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%).