Tuesday, December 1, 2009

Bargaining exam question

Suppose that a grocery store knows that 50% of its customers are Coke Loyalists (they consume only Coke); 25% are Pepsi Loyalists (they consume only Pepsi); and 25% are Switchers (they will consume either Coke or Pepsi).  If the Grocery store did not carry Pepsi, they would earn $15 million on Coke sales (before payment to Coke);  and if the store did not carry Coke, it would earn $10 million on Pepsi sales (before payment to Pepsi).  Currently the store carries both Coke and Pepsi, and earns 20 million on total soft drink sales (before payment to Coke and Pepsi). 
  1. How is the $20 million profit split between Coke, Pepsi, and the Grocery store?
  2. How would the profit be split if Coke and Pepsi merged and bargained jointly?
HINT:  the alternatives to agreement determine the terms of agreement.

NOTE:  Professors, e mail me for the answer.

REFERENCE:  Werden, Gregory and Luke Froeb, Unilateral Competitive Effects of Horizontal Mergers II: Auctions and Bargaining, Issues in Competition Law and Policy, W. Dale Collins (ed.), ABA Section of Antitrust Law, 2008, vol. 2, 1343. Available at SSRN: http://ssrn.com/abstract=956400

1 comment:

  1. an overly simple answer is that in case 1, the grocery store has some leverage in determining the profit by playing Coke and Pepsi against each other, in the second case the merged company would get a lion's share!