Market Power in the Carbonated Soft Drink Industry

Abstract

AbstractWe investigate the strategic pricing for leading brands sold in the carbonated softdrink (CSD) market in the context of a ⁄exible demand speci–cation (i.e. randomparameter nested logit) and a structural pricing equation. Our approach does not relyupon the often used ad hoc linear approximations to demand and pro–t-maximizing–rst-order conditions. We estimate the structural pricing equation using four di⁄erentestimators (i.e. OLS, LIML, 2SLS, and GMM) and compare the implied deviationfrom Bertrand-Nash competition. Our results suggest that retailers, on average, priceCSD brands below their cost, likely a result of the competitive retailing environment.We also –nd CSD wholesalers price their brands signi–cantly more cooperatively thanBertrand-Nash would suggest, thus in⁄ating pro–ts. 1 Introduction The rich content of scanner data enables the estimation of structural econometric modelsto be used to investigate market power and analyze policy. Recent advances in structuralapproaches to empirical market power analysis combines estimated demand functions withgame-theoretic models of a particular industry to estimate its competitive nature. However,economic and econometric theory are often silent on the speci–c econometric estimators thatshould be employed. Each one having similar, but di⁄ering restrictions on the assumptionsof the underlying sample from which the data is collected. As a result, the objective ofthis study is to empirically compare several di⁄erent estimators of a supply model, and lookat the di⁄erences each one implies with respect to the nature of the competitive game thecarbonated soft drink (CSD) market plays.The CSD category is used in our empirical analysis for several reasons. First, the in-dustry is highly concentrated at the manufacturing level, being largely dominated by twomanufacturers. However, retail outlets have recently been introducing, and pushing, theirown private label brands as a way of expanding category pro–ts. Second, the industry iswell known among a wide range of consumers not only in the U.S., but largely throughoutthe world. Thus many retail outlets carry the same set of products making the competitivenature of the CSD industry an empirical question at not only the manufacturer level, butalso at the retail level. Finally, given the long history of the industry, particularly in theU.S., a steady state equilibrium is likely to exist. Thus the CSD market is an ideal categoryfor comparing the competitive nature implied from several di⁄erent econometric estimators.The remainder of the paper is organized as follows. In the next section we present theeconometric model used to analyze the market power of the CSD market. This section beginswith a brief overview of the demand and supply models used, followed by their speci–cation.1