The Effect of Advertising on Collusion in the U.S. Brewing Industry: A Trigger Strategy Approach

Abstract

In response to a dramatic reduction in the number of firms and enormous advertising expenditures in the U.S. brewing industry, we explore the effect of advertising cooperativeness on the likelihood of collusion. With advertising and price as strategic variables, we analyze an infinitely repeated symmetric game and model the degree of collusion using the trigger strategy. We find that constructive advertising can decrease the critical discount factor above which collusion is sustainable by trigger strategies and thus can support collusion, while combative advertising is likely to break the collusion. The results may help fill the gap between empirical evidence and theoretical predictions regarding advertising and collusion. We perform an empirical illustration using firm level data from 1950 to 2001 of Anheuser-Busch and Miller, the two largest domestic beer producers. The evidence confirms our conjecture that the U.S. brewing industry exhibits collusion and that the firm advertising, especially that of Miller, is of the constructive type.