IDEAS home Printed from https://ideas.repec.org/p/boc/bocoec/864.html
   My bibliography  Save this paper

Empirical Properties of Diversion Ratios

Author

Listed:
  • Christopher T. Conlon

    () (New York University, Stern School)

  • Julie Holland Mortimer

    () (Boston College)

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.

Suggested Citation

  • Christopher T. Conlon & Julie Holland Mortimer, 2013. "Empirical Properties of Diversion Ratios," Boston College Working Papers in Economics 864, Boston College Department of Economics, revised 01 Jan 2019.
  • Handle: RePEc:boc:bocoec:864
    Note: Previously circulated as "An Experimental Approach to Merger Evaluation"
    as

    Download full text from publisher

    File URL: http://fmwww.bc.edu/EC-P/wp864.pdf
    File Function: main text
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Steven T. Berry & Philip A. Haile, 2009. "Nonparametric Identification of Multinomial Choice Demand Models with Heterogeneous Consumers," Cowles Foundation Discussion Papers 1718, Cowles Foundation for Research in Economics, Yale University, revised Mar 2010.
    2. James J. Heckman, 2010. "Building Bridges between Structural and Program Evaluation Approaches to Evaluating Policy," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 356-398, June.
    3. 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 201208, Department of Justice, Antitrust Division.
    4. Michael P. Keane, 2010. "A Structural Perspective on the Experimentalist School," Journal of Economic Perspectives, American Economic Association, vol. 24(2), pages 47-58, Spring.
    5. Christopher T. Conlon & Julie Holland Mortimer, 2010. "Effects of Product Availability: Experimental Evidence," NBER Working Papers 16506, National Bureau of Economic Research, Inc.
    6. Sonia Jaffe & E. Glen Weyl, 2013. "The First-Order Approach to Merger Analysis," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 188-218, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dan Hanner & Ginger Zhe Jin & Marc Luppino & Ted Rosenbaum, 2016. "Economics at the FTC: Horizontal Mergers and Data Security," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(4), pages 613-631, December.
    2. Daniel Bjorkegren, 2020. "Competition in Network Industries: Evidence from the Rwandan Mobile Phone Network," Working Papers 2020-04, Brown University, Department of Economics.
    3. Hökelekli, Gizem & Lamey, Lien & Verboven, Frank, 2017. "Private label line proliferation and private label tier pricing: A new dimension of competition between private labels and national brands," Journal of Retailing and Consumer Services, Elsevier, vol. 36(C), pages 39-52.
    4. Lydia Cheung, 2014. "The Upward Pricing Pressure Test and the Sensitivity of the Diversion Ratio," Working Papers 2014-08, Auckland University of Technology, Department of Economics.
    5. 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.
    6. Lydia Cheung, 2017. "Brand-level diversion ratios from product-level data," New Zealand Economic Papers, Taylor & Francis Journals, vol. 51(2), pages 177-192, May.

    More about this item

    Keywords

    diversion ratios; merger guidelines; Bayesian estimators; treatment effects;

    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boc:bocoec:864. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F Baum). General contact details of provider: http://edirc.repec.org/data/debocus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.