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

Aviv Nevo
The RAND Journal of Economics
Vol. 31, No. 3 (Autumn, 2000), pp. 395-421
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/2600994
Page Count: 27
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Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry
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Abstract

Traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products. I discuss an alternative, which consists of demand estimation and the use of a model of postmerger 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 and use the estimates to (1) recover marginal costs, (2) simulate postmerger price equilibria, and (3) compute welfare effects, under a variety of assumptions. The methodology is applied to five mergers, two of which occurred and for which I compare predicted to actual outcomes.

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