The Competitive and Welfare Effects of New Product Introduction: The Case of Crystal Pepsi

Wei Xiao ()
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Wei Xiao: Johns Hopkins University

No 112, Food Marketing Policy Center Research Reports from University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy

Abstract: The introduction of new products is an important method of competition in many markets. Towards understanding its impact on competition and welfare, this paper estimates the effects of Crystal Pepsi being introduced by PepsiCo. Estimating a structural model of the soft drink market, the competitive effect is decomposed into two parts: the effect on the prices of existing products from increased competition, and the effect of having additional product variety. I find that firms’ profit and consumer welfare both increased in response to the introduction of Crystal Pepsi, with the price effect accounting for nearly 90% of the gain in consumer surplus. The introduction of Crystal Pepsi is also used as an experiment to test the competitiveness of the soft drink market. Evidence of price collusion is found. In comparing the welfare impact of introducing Crystal Pepsi under price collusion and price competition, I find that social welfare increases more under collusion. Under competition, rivals of PepsiCo increase prices and, consequently, a new product introduction actually harms consumers; at the same time, PepsiCo’s profit gain is smaller. This finding suggests that firms have a stronger incentive to invest in R&D when they collude in price than when they compete in price.

Keywords: New Product Introduction; Social Welfare; Market Structure; Random Coefficient Model (search for similar items in EconPapers)
JEL-codes: L11 L13 L49 L66 O31 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2008-11
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Persistent link: https://EconPapers.repec.org/RePEc:zwi:fpcrep:112

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