A Dynamic Model of Multiproduct Firms: Advertising and Product Menu Choice in the Ready-to-Eat Cereal Industry

A common assumption in the industrial organization literature is that of exogenous product menus. While this assumption is adequate for short run models of firm behavior, long run analysis of competition requires a model that explains the evolution of the menus upon which the short run competition is based. This dissertation provides such a model. The objective of this dynamic model of multiproduct oligopoly is to understand how firms compete through menu selection in the long run.

In the model developed in this dissertation, firms offer a number of products that are differentiated by quality and market segment. Each period, a firm is given the opportunity to introduce a new product in each of the market segments. Firms are also allowed to drop any existing product from each segment. The firms then choose the extent to which to advertise the products remaining in the menu they offer to consumers, where advertising is assumed to influence the perceived quality of a product. This effect on perceived product quality is allowed to persist across time periods, i.e. advertising efforts today can affect not only today's demand, but tomorrow's demand as well. The perceived product quality decreases over time as the effects of advertising depreciate.

This dissertation is comprised of a collection of three essays. The first essay presents the model and characterizes the solution. Numerical methods are used to solve for the equilibrium and numerical comparative statics are presented, including an illustration of the models usefulness in merger analysis. The second essay describes an approach to the estimation of the model using demand from the ready-to-eat cereal industry. The third essay presents the estimates of the subset of the structural parameters relating to the consumer demand specification in the model using five years of quarterly data on brand level sales and prices collected from the IRI scanner database.