An econometric analysis of competition in a differentiated product industry: The U.S. ready-to-eat cereal industry

Date of Completion

January 1996

Keywords

Economics, Agricultural

Degree

Ph.D.

Abstract

This dissertation empirically examines demand and competition in a differentiated product market using brand level information. The breakfast cereal industry provides the empirical setting for this study. Access to IRI Infoscan data makes this work possible. Balanced panel data for 24 major cereal brands are collected with observations in 45 local markets over 20 quarters.^ An Almost Ideal Demand System (AIDS) and price reaction functions are jointly estimated to measure demand and price movement patterns for the cereal industry. This empirical work is done within a multi-stage budgeting framework. The empirical tests suggest that the segment structure we use in this study is a good approximation for the actual demand structure in this industry. The AIDS system allows us to obtain brand level demand elasticities without unduly restricting consumer preferences. The price reaction functions yield reasonably clear patterns of brand price co-movements and coordination in this industry.^ This study follows a new direction for analysis of market power and competitive effects that does not rely upon traditional structural analysis. Brand level own and cross price elasticities are estimated. Market power is decomposed into unilateral and coordinated components. The empirical results indicate that both types of market power play an important role in the cereal industry. Moreover, an acquisition of closely related products in this industry tends to raise prices. ^

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