A Simultaneous Equations Model of Coffee Brand Pricing and Advertising

Abstract

This paper explores the relationship between a differentiated brand's market share and its price in the con- text of a model that recognizes the endogeneity of the brand's advertising behavior and pricing decisions. The empirical analysis suggests that General Foods charged higher prices for its regular grind Maxwell House coffee in geographic areas where the brand's market share was relatively large. Available cross-sectional, time-series data and company documents sug- gest that this empirical relationship is attributable to the preference grocery retailers have for putting dominant coffee brands on special, rather than cross-sectional variations in costs, market concentration, or consumer tastes. I. Introduction r HIS paper explores the relationship between a differentiated brand's market share and its price in the context of a model that recognizes the endogeneity of the brand's advertising behav- ior and pricing decisions. By using price as the measure of economic performance (rather than accounting profits) and by recognizing that adver- tising is determined simultaneously with price, the empirical tests reported here avoid some of the more serious problems of structure-perfor- mance studies. Moreover, by focusing on the rela- tionship between a single brand's market share and price, this study analyzes the unilateral mar- ket power of a differentiated brand, as well as the effect of market-wide concentration on a brand's prices. The empirical analysis focuses on the hypothe- sis that the General Foods Corporation charged higher prices for its regular grind Maxwell House coffee in geographic areas where the brand's market share was large during the 1970s. We identify a statistically significant positive relation- ship between Maxwell House's wholesale price