Essays on innovation, competition and welfare

The introduction of new products is an important method of competition in many markets. Towards understanding its impact on competition and welfare, the first essay estimates the effects of Crystal Pepsi being introduced by PepsiCo. Estimating a structural model of the soft drink market, the introduction of Crystal Pepsi is used as an experiment to evaluate the competitiveness of the soft drink market. Evidence of price collusion is found. Under the collusion model, the competitive effect is decomposed into two parts: the effect on the prices of existing products from increased competition, and the effect of having additional product variety. I find that firms' profit and consumer welfare both increased in response to the introduction of Crystal Pepsi, with the price effect accounting for nearly 90% of the gain in consumer surplus, and PepsiCo taking most of the profit gain. The commonly assumed price oligopoly leads to different and counter-intuitive welfare implications. This finding suggests that examining the market structure is important to investigate the effects of new product introduction.;Obesity costs U.S. businesses billions of dollars each year in medical expenses and lost productivity. Many policy solutions are proposed and under debate to combat America's obesity epidemic, including the obesity taxation, which is a tax on high calory but low nutritious foods. Soft drink is one of the target food categories under debate and the second essay examines the obesity taxation policy in this market. Different from the market level demand models, the second essay studies the soft drink purchase timing, the choice between regular and diet products, and the quantity decision of individual households. From the scientific findings of the link between soft drink consumption and weight change, I simulate the effectiveness of various tax schemes on weight reduction. I find that the tax proportional to the calory content is around 6% more effective than the tax on the food category and that an obesity tax on the soft drink can cause weight loss, though the effect is small.;Marketers frequently apply price promotions and advertising to influence consumers' purchasing decisions. Therefore, understanding how consumers respond to price and advertising is important. Marketers believe that consumer segments will differ in their sensitivity to various market mixes. Brand loyalty is an important segmentation variable and a key component of a brand's long term viability. Conventional wisdom suggests that consumers who are loyal to a brand will be insensitive to the brand's price. At the same time, some propose that the primary role of well-established brands' advertising is to reinforce repeat purchases rather than induce brand switches. The third essay empirically tests these two hypothesis using data for the soft drink market. Different from the existing studies that employ a binary loyalty index, I construct a continuous loyalty measure which allows us to investigate the price and advertising effects along the full loyalty range. I find that neither price nor advertising effects on brand choice are monotonic in brand loyalty. In particular, the price effect is insignificant for both the least loyal and most loyal consumers, and is significant for moderately loyal consumers. Advertising has a disproportional effect on the more loyal consumers, which supports the claim that the primary effect advertising is to reinforce repeat purchases.