We study the impact of vertical integration on pricing incentives in multiproduct industries. To do so, we exploit recent variation in vertical structure in the US carbonated-beverage industry. While the elimination of double marginalization with vertical integration is normally characterized as procompetitive, economic theory predicts that it may cause anticompetitive price increases in multiproduct industries. We indeed find that vertical integration causes price decreases in products with eliminated double margins but price increases in the other products sold by the integrated firm. These results provide new evidence of anticompetitive effects of vertical mergers.

Oligopoly models of price competition predict that strategic firms exercise market power and generate inefficiencies. However, heterogeneity in firms’ strategic ability also generates inefficiencies. We study the Texas electricity market where firms exhibit significant heterogeneity in how they deviate from Nash equilibrium bidding. These deviations, in turn, increase the cost of production. To explain this heterogeneity, we embed a cognitive hierarchy model into a structural model of bidding and estimate firms’ strategic sophistication. We find that firm size and manager education affect sophistication. Using the model, we show that mergers which increase sophistication can increase efficiency despite increasing market concentration.