Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Tuesday, June 28, 2011

Market Power in the Carbonated Soft Drink Industry

Posted by D. Daniel Sokol

William J. Allender (Arizona State University) and Timothy J. Richards (Arizona State University) focus a paper on Market Power in the Carbonated Soft Drink Industry.

ABSTRACT: We investigate the strategic pricing for leading brands sold in the carbonated soft drink (CSD) market in the context of a flexible demand specification (i.e. random parameter nested logit) and a structural pricing equation. Our approach does not rely upon the often used ad hoc linear approximations to demand and profit-maximizing first-order conditions. We estimate the structural pricing equation using four different estimators (i.e. OLS, LIML, 2SLS, and GMM) and compare the implied deviation from Bertrand-Nash competition. Our results suggest that retailers, on average, price CSD brands below their cost, likely a result of the competitive retailing environment. We also find CSD wholesalers price their brands significantly more cooperatively than Bertrand-Nash would suggest, thus inflating profits.

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