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An Econometric Workbench for Comparing the Substantive and Dominance Tests in Horizontal Merger Analysis

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Author Info

  • Jerome Foncel

    ()
    (University of Lille (GREMARS))

  • Marc Ivaldi

    ()
    (Toulouse School of Economics (IDEI), EHESS and CEPR)

  • Jrisy Motis

    ()
    (Toulouse School of Economics - EHESS (GREMAQ) and University of Crete)

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    Abstract

    We investigate for the individual and relative accuracy of two major market power tests: the Herfindahl Hirschman Index (HHI), and the merger simulation model of unilateral effects. We propose a methodology to compare the predictive and screening power of both tests by implementing them in a hypothetical economy. We find that when a structural econometric approach is missed (substantive test) the concentration approach (dominance test) is biased upwards. We also find that the substantive test is influenced by the market size or more precisely the market size of the outside good. In particular, when it is large, a decision based on the HHI test would have nothing to do with a decision based on the unilateral effects test. Still, in the overall, the substantive test performs better in capturing the true situation of the market compared to the dominance test of concentration.

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    Bibliographic Info

    Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0833.

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    Length: 47 pages
    Date of creation: 15 May 2008
    Date of revision:
    Handle: RePEc:crt:wpaper:0833

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    Related research

    Keywords: mergers; antitrust; differentiated product markets; simulation;

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    References

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    1. Werden, Gregory J & Froeb, Luke M, 1994. "The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 407-26, October.
    2. Philip Crooke & Luke Froeb & Steven Tschantz & Gregory Werden, 1999. "Effects of Assumed Demand Form on Simulated Postmerger Equilibria," Review of Industrial Organization, Springer, vol. 15(3), pages 205-217, November.
    3. 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.
    4. Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Research Reports 25164, University of Connecticut, Food Marketing Policy Center.
    5. Epstein, Roy J. & Rubinfeld, Daniel, 2012. "Merger Simulation: A Simplified Approach with New Applications," Department of Economics, Working Paper Series qt2k9116ph, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    6. Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
    7. Ivaldi, Marc & Jullien, Bruno & Rey, Patrick & Seabright, Paul & Tirole, Jean, 2003. "The Economics of Tacit Collusion," IDEI Working Papers 186, Institut d'Économie Industrielle (IDEI), Toulouse.
    8. Epstein Roy J. & Rubinfeld Daniel L., 2004. "Merger Simulation with Brand-Level Margin Data: Extending PCAIDS with Nests," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-28, March.
    9. Hausman, Jerry A & Leonard, Gregory K, 2002. "The Competitive Effects of a New Product Introduction: A Case Study," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 237-63, September.
    10. Peters, Craig, 2006. "Evaluating the Performance of Merger Simulation: Evidence from the U.S. Airline Industry," Journal of Law and Economics, University of Chicago Press, vol. 49(2), pages 627-49, October.
    11. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    12. Ivaldi, Marc & Jullien, Bruno & Rey, Patrick & Seabright, Paul & Tirole, Jean, 2003. "The Economics of Unilateral Effects," IDEI Working Papers 222, Institut d'Économie Industrielle (IDEI), Toulouse.
    13. Ivaldi, Marc & McCullough, Gerard, 2005. "Welfare Trade-Offs in US Rail Mergers," CEPR Discussion Papers 5000, C.E.P.R. Discussion Papers.
    14. Daniel McFadden & Kenneth Train, 2000. "Mixed MNL models for discrete response," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 447-470.
    15. Epstein, Roy J. & Rubinfeld, Daniel L., 2001. "Merger Simulation: A Simplified Approach with New Applications," Department of Economics, Working Paper Series qt9jt389nb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    16. Ivaldi, Marc & Verboven, Frank, 2001. "Quantifying the Effects from Horizontal Mergers in European Competition Policy," CEPR Discussion Papers 2697, C.E.P.R. Discussion Papers.
    17. Epstein, Roy J. & Rubinfeld, Daniel, 2001. "Merger Simulation: A Simplified Approach with New Applications," Department of Economics, Working Paper Series qt1c65s24r, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    18. Duso, Tomaso & Neven, Damien J & Röller, Lars-Hendrik, 2003. "The Political Economy of European Merger Control: Evidence Using Stock Market Data," CEPR Discussion Papers 3880, C.E.P.R. Discussion Papers.
    19. Pinkse, Joris & Slade, Margaret E., 2004. "Mergers, brand competition, and the price of a pint," European Economic Review, Elsevier, vol. 48(3), pages 617-643, June.
    20. Froeb, Luke & Tschantz, Steven & Werden, Gregory J., 2005. "Pass-through rates and the price effects of mergers," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 703-715, December.
    21. Werden, G.J. & G.J. & Froeb, L.M., 1995. "Simulation as an Alternative to Structural Merger Policy in Differentiated Products Industries," Papers 95-02, U.S. Department of Justice - Antitrust Division.
    22. Werden, Gregory J & Froeb, Luke M, 1998. "The Entry-Inducing Effects of Horizontal Mergers: An Exploratory Analysis," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 525-43, December.
    23. Franco Mariuzzo & Patrick Paul Walsh & Ciara Whelan, 2004. "EU Merger Control in Differentiated Product Industries," CESifo Working Paper Series 1312, CESifo Group Munich.
    24. Baker, Jonathan B & Baresnahan, Timothy F, 1985. "The Gains from Merger or Collusion in Product-differentiated Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 427-44, June.
    25. Rubinfeld, Daniel L. & Epstein, Roy J., 2001. "Merger Simulation: A Simplified Approach with New Applications," Competition Policy Center, Working Paper Series qt2sq9s8c8, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
    26. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
    27. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
    28. Roy J. Epstein & Daniel L. Rubinfeld, 2002. "Merger Simulation: A Simplified Approach with New Applications," Industrial Organization 0201002, EconWPA.
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