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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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    Cited by:

    1. Christopher Conlon & Julie Holland Mortimer, 2021. "Empirical properties of diversion ratios," RAND Journal of Economics, RAND Corporation, vol. 52(4), pages 693-726, December.
    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.
    3. Christopher T. Conlon & Julie Holland Mortimer, 2013. "An Experimental Approach to Merger Evaluation," NBER Working Papers 19703, National Bureau of Economic Research, Inc.

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