Oligopolistic Price Leadership and Mergers: An Empirical Model of the U.S. Beer Industry

We examine an infinitely-repeated game of oligopoly price leadership in which each period one firm, the market leader, proposes a supermarkup over Nash-Bertrand prices. The supermarkup is chosen to maximize the leader's profit subject to all firms' incentive compatibility constraints (ICCs). We provide conditions under which the equilibrium supermarkup can be recovered from aggregate data on price and quantities. We apply the model to the U.S. beer industry over 2005-2011 and estimate that ABI and MillerCoors implemented supermarkups of $\$0.60$ in the wake of the 2008 Miller/Coors merger. Counterfactual simulations demonstrate an ICC binds, as profit is greater with even higher supermarkups. We use the implied equality constraint to jointly identify a discount factor and the antitrust risk, the remaining structural parameters. We then explore the coordinated effects of ABI's acquisition of Grupo Modelo. Without divestitures, the merger would have relaxed ICCs, resulting in substantially higher prices. Finally, we return to the Miller/Coors merger. For many parameter values, no supermarkup satisfies ICCs without the merger. Thus, the merger may have be pivotal in generating the observed price leadership behavior.