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%.