An Analysis of the Effect of the Merger Between Kimberly-Clark and Scott Paper Company on the Toilet Paper Industry Using the Random Coefficients Logit Model of Demand Estimation

Abstract

Horizontal mergers within differentiated product industries present a unique challenge to regulators because they try to balance potential price increases caused by an enhanced ability for firms to leverage larger brand portfolios with potential cost savings due to economies of scale. In examining these types of mergers, one can either observe price changes retrospectively and attempt to discern to what extent the merger caused the price change (traditional merger analysis), or create a model of the demand system that allows for the possibility of a merger between two competing firms (discrete choice merger analysis). This paper focuses on the latter method, using a random coefficients logit model on the 1996 merger between Kimberly-Clark and Scott Paper Company in the toilet paper industry as its basis for analysis. In addition to discussing the advantages of the random coefficients logit model over other discrete choice models of demand, this paper examines the merger in the context of antitrust regulation, and discusses how the results from the traditional merger analysis might differ from the results presented here.