Estimating Complementarity With Large Choice Sets: An Application to Mergers
2021; RELX Group (Netherlands); Linguagem: Inglês
10.2139/ssrn.3802097
ISSN1556-5068
AutoresDaniel Ershov, Jean-William Laliberté, Mathieu Marcoux, Scott Orr,
Tópico(s)Merger and Competition Analysis
ResumoStandard discrete choice demand models assume that products are substitutes. Merger analysesbased on these models may overstate consumer harm when producers of complementary products merge. Allowing for demand complementarity greatly complicates demand estimation, particularly when the number of choices is large. We introduce a straightforward Generalized Method of Moments estimator that identifies preferences allowing for (1) potential consumption complementarity, (2) price endogeneity and (3) large choice sets. Our estimator parsimoniously leverages information on consumer level bundle specific purchases and aggregate sales data. We apply this estimator to the chips and soda market and find a high degree of complementarity between these product groups. We show that a merger between PepsiCo/Frito-Lay and Dr. Pepper would increase soda prices by 30% less than suggested by a model that does not account for complementarity. Post-merger chip prices decrease. Overall, accounting for complementarity leads to positive welfare gains in some markets with large numbers of Frito-Lay varieties.
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