Approximating the Price Effects of Mergers: Numerical Evidence and an Empirical Application
AbstractWe analyze the accuracy of first order approximation, a method developed theoretically in Jaffe and Weyl (2012) for predicting the price effects of mergers, and provide an empirical application. Approximation is an alternative to the model-based simulations commonly employed in industrial economics. It provides predictions that are free from functional form assumptions, using data on either cost pass-through or demand curvature in the neighborhood of the initial equilibrium. Our numerical experiments indicate that approximation is more accurate than simulations that use incorrect structural assumptions on demand. For instance, when the true underlying demand system is logit, approximation is more accurate than almost ideal demand system (AIDS) simulation in 79.1 percent of the randomly-drawn industries and more accurate than linear simulation in 90.3 percent of these industries. We also develop, among other results, (i) how accuracy changes across a variety of economic environments, (ii) how accuracy is affected by incomplete data on cost pass-through, and (iii) that a simplified version of approximation provides conservative predictions of price increases.
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Bibliographic InfoPaper provided by Department of Justice, Antitrust Division in its series EAG Discussions Papers with number 201208.
Length: 50 pages
Date of creation: Oct 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-11-03 (All new papers)
- NEP-CMP-2012-11-03 (Computational Economics)
- NEP-COM-2012-11-03 (Industrial Competition)
- NEP-IND-2012-11-03 (Industrial Organization)
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