Mergers in a Model with Complementarity

Standard discrete choice models used to evaluate mergers assume that different product varieties are substitutes. However, legal defences in some recent high-profile mergers rested on demand complementarity (e.g., GE/Honeywell). Since complements tend to be priced lower by a monopolist than by a duopoly, standard models will overstate consumer harm in these mergers. We use consumer level data from Nielsen to look at two products with natural demand complementarities and a history of regulatory activity - potato chips and carbonated soda pop. We estimate a discrete choice model that allows for demand complementarity across pop and chips, using a novel estimator that leverages information on bundle specific purchases from consumer micro data, as well as aggregate scanner data. We then simulate a number of anti-trust counterfactuals in the chips and carbonated soda market. Once demand complementarity is taken into account, a merger between the chips and soda producer PepsiCo/Frito-Lay and the soda producer Dr. Pepper will reduce chip prices. Soda prices will either increase or fall, depending on the market. By contrast, the standard discrete choice model predicts that soda prices would always increase following the merger. An additional counterfactual breaking up the PepsiCo/Frito-Lay conglomerate suggests that both chip and soda prices will increase as a result.