The Welfare Effects of Incomplete Vertical Integration and Relaxed Price Competition in Common-Distributor Channels: An Empirical Analysis of the U.S. Carbonated Soft Drink Industry

Abstract

This paper studies the welfare consequences of vertical integration, focusing on the following two aspects, which have been relatively neglected in the literature, but are considered practically important: (i) vertical integration may facilitate inter-firm coordinated pricing, and (ii) it may not be as successful as expected or even harmful to the integrated entity, due to intra-firm causes such as organizational failure. For this purpose, I use and examine data of two vertical mergers (PepsiCo and Coca-Cola) from the U.S. carbonated soft drink industry to propose an empirical framework to consider these two issues as well as well-known elimination of double marginalization and foreclosure. I first conduct a difference-in-differences (DID) analysis of the price effects of vertical integration, and the estimation results suggest these two causes. I then estimate a structural model of upstream and downstream wholesale bargaining and downward price competition in consideration of common-distributor channels. My analysis suggests that only PepsiCo’s supply chain bene…ted after the merger wave: the other two chains (Coca-Cola and Dr Pepper) lost their pro…ts by more than 15%, and consumer welfare also lowered by 3%.