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Approximating the Price Effects of Mergers: Numerical Evidence and an Empirical Application

Author

Listed:
  • Nathan H. Miller

    (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)

  • Conor Ryan

    (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)

  • Marc Remer

    (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)

  • Gloria Sheu

    (Economic Analysis Group, Antitrust Division, U.S. Department of Justice)

Abstract

We analyze the accuracy of first order approximation, a method developed theoretically in Jaffe and Weyl (2012) for predicting the price effects of mergers, and provide an empirical application. Approximation is an alternative to the model-based simulations commonly employed in industrial economics. It provides predictions that are free from functional form assumptions, using data on either cost pass-through or demand curvature in the neighborhood of the initial equilibrium. Our numerical experiments indicate that approximation is more accurate than simulations that use incorrect structural assumptions on demand. For instance, when the true underlying demand system is logit, approximation is more accurate than almost ideal demand system (AIDS) simulation in 79.1 percent of the randomly-drawn industries and more accurate than linear simulation in 90.3 percent of these industries. We also develop, among other results, (i) how accuracy changes across a variety of economic environments, (ii) how accuracy is affected by incomplete data on cost pass-through, and (iii) that a simplified version of approximation provides conservative predictions of price increases.

Suggested Citation

  • 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.
  • Handle: RePEc:doj:eagpap:201208
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    File URL: https://www.justice.gov/atr/public/eag/288255a.html
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    References listed on IDEAS

    as
    1. Miller, Nathan H. & Remer, Marc & Sheu, Gloria, 2013. "Using cost pass-through to calibrate demand," Economics Letters, Elsevier, pages 451-454.
    2. Roy J. Epstein & Daniel L. Rubinfeld, 2002. "Merger Simulation: A Simplified Approach with New Applications," Industrial Organization 0201002, EconWPA.
    3. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
    4. 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.
    5. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
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    Cited by:

    1. Christopher T. Conlon & Julie Holland Mortimer, 2013. "An Experimental Approach to Merger Evaluation," NBER Working Papers 19703, National Bureau of Economic Research, Inc.
    2. Miller, Nathan H. & Remer, Marc & Sheu, Gloria, 2013. "Using cost pass-through to calibrate demand," Economics Letters, Elsevier, vol. 118(3), pages 451-454.

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