Antitrust Market Definition and the Sensitivity of the Diversion Ratio

The diversion ratio is a key ingredient for merger analysis, as mentioned in the new Horizontal Merger Guidelines (2010) in the U.S. and similar documents abroad. It is a measure of substitutability between merging goods, which determines the potential for price increase post-merger. There is little existing research on how the diversion ratio is to be estimated. This paper is the first one to explore estimation issues through standard demand estimation techniques and how changes in the antitrust market definition affect the resultant diversion ratios. I use random draws of supermarket products from a supermarket dataset to show that the estimated diversion ratios are, in fact, not greatly affected by market definition. They have the same magnitude as baseline estimates and the first significant figures vary within a small range.