Estimating the degree of market power and price-response strategies in a product-differentiated oligopoly the case of the canned tuna industry in a local market /

by 1965- Daloonpate, Apichart

This dissertation estimates the degree of market power and strategic-price responses among brands in the canned tuna industry in a local market. Weekly scanner data on the purchases of canned-tuna in Knoxville, Tennessee collected by Information Resources, Incorporated (IRI) were used for the estimation of the degree of market power and strategic-price responses. Four canned tuna brands were investigated including the three leading brands, Starkist, Chicken of the Sea, and Bumble Bee, and the competitive small-market share brands aggregated into Allother. There are two empirical parts. The first part focuses on estimation of the degrees of market power and strategic-price responses among canned tuna brands in the market based on a static approach. The second part investigates strategic-price responses based on a dynamic approach. In the first part, the market is assumed to be operated under Bertrand competition such that price is a strategic variable, and brands make their choices simultaneously. Measures of the degree of market power include the Rothschild index (RI), the O index (OI) and the Chamberlin quotient (CQ). In order to calculate these measures, each firm’s own-and cross-price elasticities and price-response elasticities are needed. These elasticities are estimated by using simultaneous equations, including the linear approximate almost ideal demand system (LA/AIDS) with the corrected Stone price index and price-reaction equations. The static analysis finds evidence of market power in the canned tuna market. Starkist and Chicken of the Sea have high market power derived from both unilateral and coordinated market power, whereas Bumble Bee maintains its market power without coordination. The strategic-price responses among brands are iv investigated through the estimated price-reaction equations. The results show that Bumble Bee conducts warfare against Starkist and Chicken of the Sea. Starkist and Chicken of the Sea positively respond to each other’s price; however, they do not respond to Bumble Bee’s price. In the second part, the Bertrand-competition assumption is replaced by an assumption that a firm in the market sets its price depending on its own past prices and those of rivals. A vector autoregressive (VAR) model is employed and its applications, including the Granger-causality test, the impulse response function (IRF) analysis, and the forecast error variance decomposition (FEVD) analysis, are used to investigate the dynamic price relationships. This study finds that although Starkist and Chicken of the Sea do not respond Bumble Bee’s price strategy during the same time period, they do over time. The findings of the second part offer valuable insights in that the study of strategic-price responses based on both static and dynamic approaches provide significantly better understanding in firms’ pricing behaviors. v