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Working Paper

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We investigate how market behavior changed in the facial tissues category, following the 1995/1996 Kimberly-Clark merger with Scott Paper Products in the paper products industry. The facial tissues category is of interest because the US Department of Justice (DOJ), anticipating reduced competition after the merger, imposed a consent decree, requiring that Scotts’ facial tissues brands be licensed out to a third party. We utilize a two-stage budgeting demand system developed by Deaton and Muellbauer (1980a), coupled with general form supply-side first order conditions to compare demand and competitive behavior before and after the merger. Our findings indicate that the merger coincides with substantial impacts on the substitution rates across different facial tissues brands, with the biggest changes for the Scott brand. We measure competitive conduct at a weekly level, using a Conjectural Variations approach. Our results indicate that before the merger, Procter and Gamble exhibited mild Stackelberg leadership in its pricing. In the year following the 1995 merger, however, we find evidence consistent with a switch in the pricing leadership role to Kimberly-Clark. Our findings are corroborated by an estimation approach that allows us to study how the parameters of the supply and demand system vary over time (see e.g. Sudhir, Chintagunta and Kadiyali 2003). Our study shows that brand ownership changes resulting from the merger can affect competitive conduct; in particular it can affect the Stackelberg price leadership position of the firms in an affected industry. We also show that competitive conduct and pricing behavior changed, despite the DOJ requirement that the Scotts brand be licensed out ensuring that the number of brands on the market remained unchanged after the merger.



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