Working Paper: NBER ID: w28589
Authors: Andrew Sweeting; Xuezhen Tao; Xinlu Yao
Abstract: We model differentiated product pricing by firms that possess private information about serially-correlated state variables, such as their marginal costs, and can use prices to signal information to rivals. In a dynamic game, we show that signaling can raise prices significantly above static complete information Nash levels, even when the privately observed state variables are restricted to lie in narrow ranges. We calibrate our model using data from the beer industry, and show that our model can explain changes in price levels, price dynamics and cost pass-through after the 2008 MillerCoors joint venture.
Keywords: dynamic oligopoly; asymmetric information; horizontal mergers; pricing strategy; differentiated products
JEL Codes: D43; D82; L13; L41; L90
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asymmetric information (D82) | strategic price signaling (D49) |
| strategic price signaling (D49) | prices above static Nash equilibrium levels (D43) |
| prices above static Nash equilibrium levels (D43) | higher equilibrium prices (D41) |
| prices above static Nash equilibrium levels (D43) | increased price volatility (G13) |
| private information about marginal costs (D40) | strategic price signaling (D49) |
| strategic price signaling (D49) | substantial increases in equilibrium prices (D53) |
| MillerCoors merger (L66) | price increases (E30) |
| MillerCoors merger (L66) | changes in pricing dynamics (D49) |