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An Experimental Approach to Merger Evaluation

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  • Christopher T. Conlon
  • Julie Holland Mortimer

Abstract

The 2010 Department of Justice and Federal Trade Commission Horizontal Merger Guidelines lay out a new standard for assessing proposed mergers in markets with differentiated products. This new standard is based on a measure of ``upward pricing pressure,'' (UPP) and the calculation of a ``gross upward pricing pressure index'' (GUPPI) in turn relies on a ``diversion ratio,'' which measures the fraction of consumers of one product that switch to another product when the price of the first product increases. One way to calculate a diversion ratio is to estimate own- and cross-price elasticities. An alternative (and more direct) way to gain insight into diversion is to exogenously remove a product from the market and observe the set of products to which consumers actually switch. In the past, economists have rarely had the ability to experiment in this way, but more recently, the growth of digital and online markets, combined with enhanced IT, has improved our ability to conduct such experiments. In this paper, we analyze the snack food market, in which mergers and acquisitions have been especially active in recent years. We exogenously remove six top-selling products (either singly or in pairs) from vending machines and analyze subsequent changes in consumers' purchasing patterns, firm profits, diversion ratios, and upward pricing pressure. Using both nonparametric analyses and structural demand estimation, we find significant diversion to remaining products. Both diversion and the implied upward pricing pressure differ significantly across manufacturers, and we identify cases in which the GUPPI would imply increased regulatory scrutiny of a proposed merger.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19703.

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Date of creation: Dec 2013
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Handle: RePEc:nbr:nberwo:19703

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  1. Michael P. Keane, 2010. "A Structural Perspective on the Experimentalist School," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 24(2), pages 47-58, Spring.
  2. Liran Einav & Jonathan Levin, 2010. "Empirical Industrial Organization: A Progress Report," Discussion Papers, Stanford Institute for Economic Policy Research 09-010, Stanford Institute for Economic Policy Research.
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  5. Joshua D. Angrist & Jörn-Steffen Pischke, 2010. "The credibility revolution in empirical economics: how better research design is taking the con out of econometrics," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 48898, London School of Economics and Political Science, LSE Library.
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  7. Aviv Nevo & Michael D. Whinston, 2010. "Taking the Dogma out of Econometrics: Structural Modeling and Credible Inference," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 24(2), pages 69-82, Spring.
  8. Aviv Nevo, 2003. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Microeconomics, EconWPA 0303006, EconWPA.
  9. Christopher T. Conlon & Julie Holland Mortimer, 2010. "Effects of Product Availability: Experimental Evidence," NBER Working Papers 16506, National Bureau of Economic Research, Inc.
  10. James J. Heckman, 2010. "Building Bridges Between Structural and Program Evaluation Approaches to Evaluating Policy," NBER Working Papers 16110, National Bureau of Economic Research, Inc.
  11. Nathan H. Miller & Conor Ryan & Marc Remer & Gloria Sheu, 2012. "Approximating the Price Effects of Mergers: Numerical Evidence and an Empirical Application," EAG Discussions Papers, Department of Justice, Antitrust Division 201208, Department of Justice, Antitrust Division.
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