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Merger simulations with observed diversion ratios

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  • Mathiesen, Lars

    ()
    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Nilsen, Øivind Anti

    ()
    (Dept. of Economics, Norwegian School of Economics and Business Administration)

  • Sørgard, Lars

    ()
    (Dept. of Economics, Norwegian School of Economics and Business Administration)

Abstract

A common approach to merger simulations used in antitrust cases is to calibrate demand from market shares and a few additional parameters. When the products involved in the merger case are differentiated along several dimensions, the resulting diversion ratios may be very different from those based upon market shares. This again may affect the predicted post-merger price effects. This article shows how merger simulation can be improved by using observed diversion ratios. To illustrate the effects of this approach we use diversion ratios from a local grocery market in Norway. In this case diversions from the acquired to the acquiring stores were considerably smaller than suggested by market shares, and the predicted average price increase from the acquisition was 40 % lower using this model rather than a model based upon market shares. This analysis also suggests that even a subset of observed diversion ratios may significantly change the prediction from a merger simulation based upon market shares.

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Bibliographic Info

Paper provided by Department of Economics, Norwegian School of Economics in its series Discussion Paper Series in Economics with number 27/2010.

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Length: 31 pages
Date of creation: 30 Sep 2010
Date of revision:
Handle: RePEc:hhs:nhheco:2010_027

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Keywords: Merger simulation; diversion ratio; asymmetric differentiation; merger policy.;

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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. Bordley, Robert F, 1985. "Relating Elasticities to Changes in Demand," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(2), pages 156-58, April.
  3. Farrell, Joseph & Shapiro, Carl, 2008. "Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition," Competition Policy Center, Working Paper Series qt8z51b1q8, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  4. Bordley, Robert F, 1993. "Estimating Automotive Elasticities from Segment Elasticities and First Choice/Second Choice Data," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 455-62, August.
  5. Ivaldi, Marc & Verboven, Frank, 2005. "Quantifying the effects from horizontal mergers in European competition policy," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 669-691, December.
  6. Mathiesen, Lars & Nilsen, Øivind Anti & Sørgard, Lars, 2011. "Merger simulations with observed diversion ratios," International Review of Law and Economics, Elsevier, vol. 31(2), pages 83-91, June.
  7. Roy J. Epstein & Daniel L. Rubinfeld, 2002. "Merger Simulation: A Simplified Approach with New Applications," Industrial Organization 0201002, EconWPA.
  8. 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.
  9. 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.
  10. Jerry HAUSMAN & Gregory LEONARD & J. Douglas ZONA, 1994. "Competitive Analysis with Differentiated Products," Annales d'Economie et de Statistique, ENSAE, issue 34, pages 159-180.
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Cited by:
  1. Mathiesen, Lars & Nilsen, Øivind Anti & Sørgard, Lars, 2010. "Merger simulations with observed diversion ratios," Discussion Paper Series in Economics 27/2010, Department of Economics, Norwegian School of Economics.

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