Richard Friberg

We show, in a simple stylized setting, that the combination of multiproduct firms and concentrated markets yield dampened price responses to marginal cost shocks but amplified price responses to demand shocks. To quantitatively assess the empirical relevance of this effect, we estimate a structural demand model for the Swedish retail market for beer and use our model and estimates to simulate counterfactual prices in response to cost and demand shocks. We find that when modeling each product as a firm, aggregate price responses to cost (demand) shocks are higher (lower) than for the actual ownership pattern. Due to variations in the magnitude of crossprice elasticities and the level of concentration in the different market segments, the size of the effect for cost shocks can range from close to around one percent to six percent. The effect amplifies reactions to demand shocks substantially. The high number of products in the market, however, keeps the overall price impact of demand shocks low.