Product Differentiation and Mergers in the Carbonated Soft Drink Industry

I simulate the competitive impact of several soft drink mergers from the 1980s on equilibrium prices and quantities. An unusual feature of soft drink demand is that, at the individual purchase level, households regularly select a variety of soft drink products. Specifically, on a given trip households may select multiple soft drink products and multiple units of each. A concern is that using a standard discrete choice model that assumes single unit purchases may understate the price elasticity of demand. To model the sophisticated choice behavior generating this multiple discreteness , I use a household-level scanner data set. Market demand is then computed by aggregating the household estimates. Combining the aggregate demand estimates with a model of static oligopoly, I then run the merger simulations. Despite moderate price increases, I find substantial welfare losses from the proposed merger between Coca-Cola and Dr. Pepper. I also find large price increases and corresponding welfare losses from the proposed merger between Pepsi and 7 UP and, more notably, between Coca-Cola and Pepsi.