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Merger Simulation with Brand-Level Margin: Extending PCAIDS with Nests

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Author Info

  • Roy J. Epstein

    (Carroll School of Management, Boston College)

  • Dniel L. Rubinfeld

    (Boalt School of Law & Department of Economics, University of California, Berkeley)

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    Abstract

    We present a method to calibrate empirically the demand parameters in a merger simulation model by using brand-level profit margin data. While the approach can be generalized, we develop these ideas within a particular framework the PCAIDS (proportionality- calibrated AIDS) model. We show that the brand-level margins effectively define product "nests" (products that are especially close substitutes) and substantially increase the flexibility of PCAIDS for modeling critical own- and cross-price elasticities. The model is particularly valuable for transactions at the wholesale level (where scanner data do not exist) and for geographic markets that span national borders (where comparable data may not be available), since other methods to derive elasticities, particularly those based on econometric estimation, may not be possible or may not be reliable.

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    File URL: http://128.118.178.162/eps/io/papers/0401/0401003.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series Industrial Organization with number 0401003.

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    Length: 28 pages
    Date of creation: 08 Jan 2004
    Date of revision:
    Handle: RePEc:wpa:wuwpio:0401003

    Note: 28 pages, Adobe.pdf
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    Web page: http://128.118.178.162

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    1. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
    2. 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.
    3. Roy J. Epstein & Daniel L. Rubinfeld, 2002. "Merger Simulation: A Simplified Approach with New Applications," Industrial Organization 0201002, EconWPA.
    4. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
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    Cited by:
    1. Germán Coloma, 2004. "Econometric Estimation of PCAIDS Models," CEMA Working Papers: Serie Documentos de Trabajo. 276, Universidad del CEMA.

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