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DIFFERENTIAL MERGER EFFECTS: The Case of the Personal Computer Industry

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  • Christos Genakos
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    Abstract

    This paper examines how information on the purchasing patterns of differentcustomer segments can be used to more accurately evaluate the economicimpact of mergers. Using a detailed dataset for the leading manufacturers in theUS during the late nineties, I evaluate the welfare effects of the biggest ($25billion) merger in the history of the PC industry between Hewlett-Packard andCompaq. I follow a two-step empirical strategy. In the first step, I estimate ademand system employing a random coefficients discrete choice model. In thesecond step, I simulate the postmerger oligopolistic equilibrium and compute thewelfare effects. I extend previous research by analysing the merger effects notonly for the whole market but also for three customer segments (home, smallbusiness and large business). Results from the demand estimation and mergeranalysis reveal that: (i) the random coefficients model provides a more realisticmarket picture than simpler models, (ii) despite being the world's second andthird largest PC manufacturers, the merged HP-Compaq entity would not raisepostmerger prices significantly, (iii) there is considerable heterogeneity inpreferences across segments that persists over time, and (iv) the merger effectsdiffer considerably across segments.

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    File URL: http://sticerd.lse.ac.uk/dps/ei/ei39.pdf
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    Bibliographic Info

    Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Economics of Industry Papers with number 39.

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    Date of creation: Dec 2004
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    Handle: RePEc:cep:stieip:39

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    Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

    Related research

    Keywords: Computer industry; discrete choice models; merger analysis; productdifferentiation; random coefficients.;

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    1. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
    2. Steven Berry & Oliver Linton & Ariel Pakes, 2002. "Limit Theorems for Estimating the Parameters of Differentiated Product Demand Systems," Cowles Foundation Discussion Papers 1372, Cowles Foundation for Research in Economics, Yale University.
    3. Bajari, Patrick & Benkard, C. Lanier, 2004. "Demand Estimation With Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," Research Papers 1842, Stanford University, Graduate School of Business.
    4. Daniel A. Ackerberg & Marc Rysman, 2002. "Unobserved Product Differentiation in Discrete Choice Models: Estimating Price Elasticities and Welfare Effects," NBER Working Papers 8798, National Bureau of Economic Research, Inc.
    5. Barry L. Bayus, 1998. "An Analysis of Product Lifetimes in a Technologically Dynamic Industry," Management Science, INFORMS, vol. 44(6), pages 763-775, June.
    6. C. Lanier Benkard & Patrick Bajari, 2004. "Demand Estimation with Heterogeneous Consumers and Unobserved Product Characteristics: A Hedonic Approach," NBER Working Papers 10278, National Bureau of Economic Research, Inc.
    7. Barry L. Bayus & William P. Putsis, Jr., 1999. "Product Proliferation: An Empirical Analysis of Product Line Determinants and Market Outcomes," Marketing Science, INFORMS, vol. 18(2), pages 137-153.
    8. Steven Berry & Ariel Pakes, 2007. "The Pure Characteristics Demand Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1193-1225, November.
    9. Steven Berry & Michael Carnall & Pablo T. Spiller, 1996. "Airline Hubs: Costs, Markups and the Implications of Customer Heterogeneity," NBER Working Papers 5561, National Bureau of Economic Research, Inc.
    10. Berry, Steven & Pakes, Ariel, 1993. "Some Applications and Limitations of Recent Advances in Empirical Industrial Organization: Merger Analysis," American Economic Review, American Economic Association, vol. 83(2), pages 247-52, May.
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