Monday, May 3, 2010
Posted by D. Daniel Sokol
Steven Tenna (FTC), Luke Froeb (Vanderbilt), and Steven Tschantz (Vanderbilt) ponder Mergers when firms compete by choosing both price and promotion.
ABSTRACT: We analyze the bias from predicting merger effects using structural models of price competition when firms actually compete using both price and promotion. We extend the standard merger simulation framework to allow for competition over both price and promotion and ask what happens if we ignore promotional competition. This model is applied to the super-premium ice cream industry, where a merger between Nestlé and Dreyer's was challenged by the Federal Trade Commission. We find that ignoring promotional competition significantly biases the predicted price effects of a merger to monopoly (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%).