Merger, Product Variety and Firm Entry: The Retail Craft Beer Market in California

We study the effects of merger on firm entry, product variety and prices in the retail craft beer market in California. We develop a new method to estimate multiple-discrete choice models in order to recover fixed costs. The method is based on bounds of conditional choice probabilities and does not require solving a game. Using the estimated model, we simulate a counterfactual merger where a large brewery acquires multiple craft breweries. In most markets, we find that new firms enter, non-merging incumbents add products, and merging firms drop products. However, the net effects of product variety from new firm entry and incumbent product portfolio adjustment differ considerably across markets. Larger markets are more likely to see an increase in product variety, which moderates the loss of consumer surplus from the merger's price effects. In a majority of smaller markets, product variety decreases, exacerbating the welfare loss from the price effects.