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An Econometric Analysis of the Demand for RTE Cereal: Product Market Definition and Unilateral Market Power Effects

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  • Ronald W. Cotterill
  • Lawrence E. Haller

Abstract

This research report is the econometric analysis of product market definition and unilateral market power that the senior author presented as expert economic witness for the state of New York in State of New York v. Kraft General Foods et al. at trial in September 1994. It is the first, and to date as of September 1997, only full-scale attempt to present in a federal district court analysis of a merger?s impact using scanner generated brand level data and econometric techniques to estimate brand and category level elasticities of demand. The court rejected this analysis [State of New York v. Kraft General Foods, 926 F. supp. 358 (S.D. N.Y. 1995)]. We think that it should not have done so, and would like to make this work more readily available than the court record so that economists who are working on the analysis of market definition and market power can review it. Also, this study is the only public study to date that has had access to weekly brand level coupon distribution data by city, and Nielsen group rating points (GRP), which are weekly measures of ad exposure for a brand in local city market areas. Thus it provides own and cross brand coupon and advertising elasticities. The empirical results are generally as hypothesized; own advertising and couponing increase sales, competitor activities reduce sales. The genesis of this work during litigation is an interesting story for those who would attempt to do similar work on a merger case. The acquisition of Nabisco Shredded Wheat by Philip Morris via its Kraft General Foods subsidiary occurred in the fall of 1992. Robert Abrams, the New York Attorney General, announced his challenge of the merger in January 1993. For over a year litigation moved through a series of hearings and rulings. In the spring of 1994 and earlier, the state of New York asked via discovery for any scanner data on Ready-to-Eat (RTE) cereal that the defendants possessed. Defendants provided no data. In July 1994, in preparation for the trial that occurred in September/October 1994, the senior author of this report prepared ?Expert Report of Ronald W. Cotterill? [93 Civ. 0811 (KMW)]. Exhibit 6 of that report was an analysis of unilateral market power using brand level elasticities of demand from the business records of the defendants. It documented the exercise of unilateral market power between Post and Nabisco brands. The first section of that exhibit is reproduced as the foreword to this report because it nicely explains unilateral power analysis.1 Defendants responded to this statistical analysis by introducing on the eve of trial (August 29, 1994) in ?Expert Report of Daniel L. Rubinfeld? [their economist] a comprehensive scanner data set for the leading brands of breakfast cereal and an analysis to refute our work. Using the scanner data that finally became available, we had 18 days to produce the analysis presented in this research report. It was presented to the court as Exhibit C in Affidavit of Professor Ronald W. Cotterill, September 16, 1994 (State of New York v. Kraft General Foods et al. 93 Civ. 0811 [KMW]). One of defendant?s responses to this econometric study was to introduce data for four additional brands during trial and claim that their incorporation destroyed a key market definition result of this analysis. In fact, when those brands were included the general conclusions of this study did not change [trial transcript @ Vol. 7, p. 1249]. Defendants also presented other criticisms of this study at trial and we rebutted them. Here we are not presenting arguments made at trial surrounding this report, nor are we presenting any discussion from Judge Wood's opinion wherein she rejects this analysis. A full understanding of this econometric foray into court requires reading of the defendant?s economist expert report, especially the statistical analysis, the trial transcript, and the court?s opinion. The defendant?s economist?s report is briefly critiqued at the end of this report (pages 17-19). It is a classic example of ?garbage in garbage out? analysis. A future report by the senior author of this report will present a complete review.

Suggested Citation

  • Ronald W. Cotterill & Lawrence E. Haller, 1997. "An Econometric Analysis of the Demand for RTE Cereal: Product Market Definition and Unilateral Market Power Effects," Food Marketing Policy Center Research Reports 035, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    • Handle: RePEc:zwi:fpcrep:035
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    References listed on IDEAS

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    1. Cotterill, Ronald W., 1989. "Private Initiatives for Rural Development: Ideological Cop Out or Engine for Progress," Research Reports 25180, University of Connecticut, Food Marketing Policy Center.
    2. Johnson, Gary V., 1989. "An Examination of the Connecticut Dairy Inspection Program," Research Reports 25169, University of Connecticut, Food Marketing Policy Center.
    3. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
    4. repec:adr:anecst:y:1994:i:34:p:06 is not listed on IDEAS
    5. Josephine A. Mauskopf, 1990. "Risk Characterization for Food Additives and Contaminants," Food Marketing Policy Center Research Reports 008, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    6. Cotterill, Ronald W., 1994. "Scanner Data: New Opportunities For Demand And Competitive Strategy Analysis," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 23(2), pages 1-15, October.
    7. Ann Fisher, 1990. "A Perspective on Valuing Changes in Health Risk," Food Marketing Policy Center Research Reports 009, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    8. Ronald W. Cotterill & Andrew W. Franklin & Lawrence E. Haller, 1994. "Harvesting and Tacit Collusion in the Breakfast Cereal Industry: A Case Study of Nabisco Shredded Wheat and Post Grape Nuts," Issue Papers 06, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    9. Cotterill, Ronald W., 1989. "Mergers and Concentration in Food Retailing: Implications for Performance and Merger Policy," Research Reports 25214, University of Connecticut, Food Marketing Policy Center.
    10. Cotterill, Ronald W. & Pinkerton, Don C., 1989. "Changing Connecticut's Dairy Regulations: Implications for Performance in the Northeast Dairy Industry," Research Reports 25228, University of Connecticut, Food Marketing Policy Center.
    11. Ronald W. Cotterill & Andrew W. Franklin & Li Yu Ma, 1996. "Measuring Market Power Effects in Differentiated Product Industries: An Application to the Soft Drink Industry," Food Marketing Policy Center Research Reports 032, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    12. Leonard, Robert L. & Wadsworth, James J., 1989. "Consumer Preferences: A Guide to Connecticut Apple Marketing," Research Reports 25203, University of Connecticut, Food Marketing Policy Center.
    13. Jain, Subhash C., 1994. "Global Competitiveness in the Bottled Water Industry: A Case Study," Research Reports 25187, University of Connecticut, Food Marketing Policy Center.
    14. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, September.
    15. Johnson, Gary V. & Ulen, Thomas S. & Alho, Juha M., 1989. "Optimal Public Policies to Minimize Risks of Genotoxic Harms: A Comparison of the Efficiency of Administrative Agency Regulation and Tort Liability," Research Reports 25163, University of Connecticut, Food Marketing Policy Center.
    16. Cotterill, Ronald & Franklin, Andrew & Haller, Lawrence, 1994. "Harvesting and Tacit Collusion in the Breakfast Cereal Industry: A Case Study of Nabisco Shredded Wheat and Post Grape Nuts," Issue Papers 160504, University of Connecticut, Food Marketing Policy Center.
    17. Carlton, Dennis W. & Perloff, Jeffrey M., 1989. "The Economics of Information," Research Reports 25156, University of Connecticut, Food Marketing Policy Center.
    18. Baker, Jonathan B & Baresnahan, Timothy F, 1985. "The Gains from Merger or Collusion in Product-differentiated Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 427-444, June.
    19. Subhash C. Jain, 1994. "Global Competitiveness in the Bottled Water Industry: A Case Study," Food Marketing Policy Center Research Reports 027, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    20. Robert L. Leonard & James J. Wadsworth, 1989. "Consumer Preferences: A Guide to Connecticut Apple Marketing," Food Marketing Policy Center Research Reports 004, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    21. Cotterill, Ronald W., 1994. "Scanner Data: New Opportunities for Demand and Competitive Strategy Analysis," Agricultural and Resource Economics Review, Cambridge University Press, vol. 23(2), pages 125-139, October.
    22. Gary V. Johnson, 1989. "An Examination of the Connecticut Dairy Inspection Program," Food Marketing Policy Center Research Reports 007, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    23. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
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    Cited by:

    1. Ronald W. Cotterill, 1999. "Continuing Concentration in Food Industries Globally: Strategic Challenges to an Unstable Status Quo," Food Marketing Policy Center Research Reports 049, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    2. Lubatkin, Michael H. & Schulze, William S. & Mainkar, Avinash & Cotterill, Ronald W., 1998. "Towards a Post-Structural View of Competition: Three Cases of Horizontal Merger," Research Reports 25150, University of Connecticut, Food Marketing Policy Center.
    3. Ronald W. Cotterill, 2007. "Market Definition and Market Power in the British Supermarket Industry," Food Marketing Policy Center Research Reports 098, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
    4. Mojduszka, Eliza M., 2001. "Integration Of A Product Choice Model And A Latent Variable Model Of Nutrition Information," 2001 Annual meeting, August 5-8, Chicago, IL 20678, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Cotterill, Ronald, 1998. "Jawboning Cereal: The Campaign to Lower Cereal Prices," Issue Papers 161559, University of Connecticut, Food Marketing Policy Center.
    6. Patalinghug, Jason C., 2013. "The Effect of Advertising and In-Store Promotion on the Demand for Chocolate," Working Paper series 159981, University of Connecticut, Charles J. Zwick Center for Food and Resource Policy.
    7. Cotterill, Ronald W., 1999. "Continuing Concentration in the U.S.: Strategic Challenges to an Unstable Status Quo," Research Reports 25165, University of Connecticut, Food Marketing Policy Center.
    8. Ronald W. Cotterill, 1999. "High cereal prices and the prospects for relief by expansion of private label and antitrust enforcement," Agribusiness, John Wiley & Sons, Ltd., vol. 15(2), pages 229-245.
    9. Ronald W. Cotterill, 2010. "Antitrust economic analysis in food marketing channels: a global perspective," Agricultural Economics, International Association of Agricultural Economists, vol. 41(s1), pages 83-91, November.
    10. Cotterill, Ronald W., 2000. "Dynamic Explanations of Industry Structure and Performance," Research Reports 25224, University of Connecticut, Food Marketing Policy Center.
    11. Vickner, Steven S. & Davies, Stephen P. & Fulton, Joan R. & Vantreese, Valerie L., 2000. "Estimating Market Power And Pricing Conduct For Private-Label And National Brands In A Product-Differentiated Oligopoly: The Case Of A Frozen Vegetable Market," Journal of Food Distribution Research, Food Distribution Research Society, vol. 31(2), pages 1-13, July.
    12. Dhar, Tirtha Pratim & Chavas, Jean-Paul & Cotterill, Ronald W., 2003. "An Economic Analysis of Product Differentiation under Latent Separability," 2003 Annual meeting, July 27-30, Montreal, Canada 21892, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    13. Matthew Shum, 2004. "Does Advertising Overcome Brand Loyalty? Evidence from the Breakfast‐Cereals Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 241-272, June.

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