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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