Estimation of Industry Conduct in Differentiated Products Markets

The Evolution of Pricing Behavior in the RTE Cereal Industry

Abstract

We estimate the evolution of competition in the ready-to-eat (RTE) cereal industry. To separately identify detailed patterns of industry conduct from unobserved marginal cost shocks, we construct novel instruments that interact data on rival firms’ promotional activities with measures of products’ relative isolation in the characteristics space. We find strong evidence for partial price coordination among cereal manufacturers in the beginning of our sample. Manufacturers’ price coordination intensifies following a horizontal merger in 1993, with median manufacturer margins increasing from 20.8 to 38.1 percent over those implied by multiproduct Bertrand-Nash pricing, but eventually fully breaks down to multiproduct Bertrand-Nash pricing.

Status
revise and resubmit RAND