Hero Honda

Estimating Coke and Pepsi’s Price and Advertising Strategies

Amos Golan*

Larry S. Karp**

Jeffrey M. Perloff**

March 1999

*

**

American University

University of California, Berkeley, and Giannini Foundation

We benefitted greatly from George Judge’s comments about econometrics and

Leo Simon’s comments on game theory. We are very grateful to Jean Jacques

Laffont, Quang Vuong, and especially Farid Gasmi for generously providing us

with the data used in this study and for advice. We received useful suggestions

from participants at the "Industrial Organization and Food-Processing Industry"

conference at the Institute D’Economie Industrielle at the Université des

Sciences Sociales de Toulouse and anonymous referees and the associate editor.

We thank Gary Casterline and Dana Keil for substantial help with computer

programs.

Contact:

Jeffrey M. Perloff (510/642-9574; 510/643-8911 fax)

Department of Agricultural and Resource Economics

207 Giannini Hall

University of California

Berkeley, California 94720

perloff@are.Berkeley.Edu

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Table of Contents

1. INTRODUCTION

1

2. OLIGOPOLY GAME

2.1 Strategies

2.2 Econometric Implications

3

4

5

3. GENERALIZED-MAXIMUM-ENTROPY ESTIMATION APPROACH

3.1 Background: Classical Maximum Entropy Formulation

3.2 Incorporating Sample Information

3.3 Incorporating the Non-Sample (Game-Theoretic) Information

3.4 Properties of the Estimators and Normalized Entropy

7

7

9

11

14

4. COLAS

4.1 Cola Estimates

4.2 Tests

4.3 Lerner Measures

4.4 Effects of the Exogenous Variables

15

17

20

22

23

5. CONCLUSIONS

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REFERENCES

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Appendix 1: The GME-Nash Estimator

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Abstract

A semi-parametric, information-based estimator is used to estimate strategies in prices

and advertising for Coca-Cola and Pepsi-Cola. Separate strategies for each firm are estimated

with and without restrictions from game theory. These information/entropy estimators are

consistent and...