Review of Industrial Organization 25: 275–293, 2004.
© 2004 Kluwer Academic Publishers. Printed in the Netherlands.
Estimation of the Effects of New Brands on
Incumbents’ Proﬁts and Consumer Welfare: The
U.S. Processed Cheese Market Case
International Development Program, International University of Japan, Yamato-machi,
Minami Uonuma-gun, Niigata 949-7277, Japan
Abstract. I estimate the effects of new brands on market competition and consumer
welfare in the U.S. processed cheese market. I ﬁnd that an observed increase in consum-
er welfare was attributable mainly to an increase in the number of brands in the sam-
ple market, while the price effect, which measures welfare change caused by adding new
brands to existing brands, decreased welfare as the prices of the existing brands increased
in a large portion of sample markets. The price increase was most pronounced among
the introducer’s existing brands. I also ﬁnd that the data used in the paper identify a
signiﬁcant enhancement of consumer welfare as a result of the change in product char-
acteristics provided by new brands even if a large portion of welfare gain is explained by
the assumption on the error term in the utility function.
Key words: Consumer welfare, incumbent’s proﬁts, new brands, random coefﬁcient model.
JEL Classiﬁcations: D40, D60, L13, L66, H20.
This paper measures the effects of new brands on the U.S. processed cheese
market in terms of consumers’ welfare and ﬁrms’ proﬁts. Processed cheese
is a special use product produced for sandwiches and cheeseburgers and
is sold pre-sliced in packages (with slices often individually wrapped). The
market consists of a dominant ﬁrm, Phillip Morris, and other small-share
ﬁrms such as Borden, Land O’Lakes, and Heinz. During the sample pe-
riod, from the ﬁrst quarter of 1988 to the fourth quarter of 1992, Phillip
Morris introduced three low-fat cheese brands into the markets. They are
Kraft Free, Kraft Light and Velveeta Light. Considering that knowledge of
the relationship between dietary fat and heart disease has been spreading
rapidly since the mid 1980s, the introduction of low-fat segment brands in