Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry

Abstract

Traditional merger analysis, based on market definition and use of concentration measures to infer potential anti-competitive effects, is problematic and difficult to implement when evaluating mergers in industries with differentiated products. This paper discusses an alternative, which consists of demand estimation and the use of a model of post-merger conduct to simulate the competitive effects of a merger. I estimate a brand-level demand system for ready-to-eat cereal using supermarket scanner data. Demand parameter estimates are used to (1) recover marginal costs, (2) simulate post-merger price equilibria and (3) compute welfare effects, under a variety of assumptions. The methodology is applied to two recent mergers, one proposed merger that was called off and two hypothetical mergers among cereal manufacturers. For the two mergers that occurred predicted outcomes are compared to actual outcomes.

JEL Classification: L51, L66