Merger Analysis with IIA Demand and Type Aggregation

We propose a framework for merger analysis with multiproduct firms under generalized CES (GCES) and generalized multinomial logit (GMNL) demand. Despite allowing for arbitrary firm and product heterogeneity, we obtain the type aggregation property: All relevant information about a firm's product portfolio can be summarized in a uni-dimensional sufficient statistic, the firm's type. Indeed, GCES and GMNL are shown to be the only IIA demand systems giving rise to that property. Relative to standard CES and MNL demand, our generalization implies that prices, locally, can be strategic complements or substitutes, depending on the local behavior of the curvature of indirect utility. In turn, this distinction is shown to determine whether competition authorities should be more or less strict on mergers in more competitive industries. We obtain further results on the static and dynamic consumer surplus effects of mergers, the aggregate surplus and external effects of mergers, and on the relationship between the market power effect of a merger and the merger-induced change in the Herfindahl index.