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The Diversion Story: Resolving The Ambiguities Surrounding The Concept Of Diversion Ratio

Author

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  • Adriaan ten KateSr.
  • Gunnar Niels

Abstract

Carl Shapiro introduced the diversion ratio as an analytical tool in the assessment of mergers with differentiated products, but he did so with a degree of ambiguity as to its precise definition. We show that his diversion ratio between two products (A and B) can be, and has been, interpreted in two distinct ways: first, as the fraction of customers leaving Product A that switch to Product B, and second, as the increased sales of B as a fraction of the lost sales of A. To establish a proper relationship between lost and captured profits, which is the main purpose of the diversion ratio, the first interpretation does not work. This ambiguity surrounding the concept of the diversion ratio has given rise to confusion (although algebraic elaborations in the literature are usually more precise than the language used). Practitioners relying on customer surveys to estimate diversion ratios need to be aware of the potential pitfalls when tailoring the survey questions to the incorrect definition of the ratio.

Suggested Citation

  • Adriaan ten KateSr. & Gunnar Niels, 2014. "The Diversion Story: Resolving The Ambiguities Surrounding The Concept Of Diversion Ratio," Journal of Competition Law and Economics, Oxford University Press, vol. 10(2), pages 361-374.
    • Handle: RePEc:oup:jcomle:v:10:y:2014:i:2:p:361-374.
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    File URL: http://hdl.handle.net/10.1093/joclec/nht043
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    Cited by:

    1. Lydia Cheung, 2016. "Antitrust Market De nition and the Sensitivity of the Diversion Ratio," Working Papers 2016-02, Auckland University of Technology, Department of Economics.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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