Vertical Integration, Prices and Product Proliferation: Evidence from the Soda Industry (Job Market Paper)

Upstream and downstream firms both charge markup. Separated production generally incurs higher cost. Different incentives of up- and down-stream firms and high negotiation costs may impede new product introduction and product offering. Vertical integration solves these problems. This paper studies empirically the effect of vertical integration: whether vertical integration brings synergy and eliminates double marginalization, which lead to a lower price, and whether vertical integration eases the process of new product introduction, which leads to an increase in number of products offered on market. Specifically, this paper studies the 2010 vertical integrations of the largest two soda companies, The Coca-Cola Company and PepsiCo., with their largest downstream bottlers, respectively, by using bottlers’ territory maps and prices and sales data. Results show that the vertical integrations lead to 0.3%-0.6% price decrease for Coca-Cola and 1.4%-1.6% price decrease for Pepsi; and they lead to more new products introduced to vertically integrated markets: annually 1.4-1.5 more new products for Coca-Cola, and 1.5-2.6 more new products for Pepsi. Furthermore, after vertical integrations, the new characteristics in new products are the characteristics that are more innovative, and the new product roll-out process is faster. The paper and its results provide a new perspective that has long been overlooked when evaluating vertical mergers, and the implication is important for anti-trust policies and their enforcement.

The political economy of making an authoritarian constitution: The case of China (with Di Guo, Kun Jiang, and Chenggang Xu)

This paper studies, theoretically and empirically, the rational of the Chinese Communist Party (CCP)’s constitutional transformation from totalitarian to authoritarian. The premise of our theory is that the rational of the Party is centered on its power, which relies on the support of social elites in the economy. When an economy is in transition, who are the elites is in change. From the Party’s stand, a totalitarian constitution may become suboptimal under that situation. Making an authoritarian constitution may create conditions for maintaining the Party’s power. Our theoretical predictions are supported by empirical evidence/tests based on Chinese data at firm level, city level and national level, during the period of 2002/2004 party/state constitutional changes.

The effect of vertical integration on competitor’s new product introduction

In vertical structure, upstream firm and downstream firm coordinate to introduce new products to markets. When a downstream firm which serves multiple upstream firms vertically integrates with one upstream firm, the effect on new product introduction is ambiguous: on the one hand, the vertical integration eases the process of new product introduction for the integrated upstream firm; on the other hand, the integrated firm may have incentive to impede the process of new product introduction for other upstream firms that the integrated downstream serves. This paper studies the effect of vertical integrations on upstream competitors’ new product introduction process by exploring the vertical integrations in soda industry. Coca-Cola and Pepsi vertically integrated with their largest downstream bottlers in 2010, and in some markets, either Coca-Cola or Pepsi’s integrated bottler also serves Dr.Pepper. The vertical integrations of Cola-Cola and Pepsi with their bottlers may have anticompetitive effects on Dr.Pepper’s new product introduction.