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Merger simulation is poised to become a standard economic tool to evaluate the potential unilateral price effects of mergers. A recent FTC working paper includes merger simulation among the past decade’s "remarkable developments in the quantitative analysis of horizontal mergers." (See Issues in Econometric Analysis of Scanner Data at www.ftc.gov). Despite its usefulness, however, simulation is probably still unfamiliar to many antitrust practitioners.
Unilateral effects are most relevant in markets with differentiated products. The competitive concern arises when a substantial number of customers who previously would have been lost after a price increase might be retained because the merged firm also offers the alternative brand preferred by these customers. In this case, the merged firm may find that it is profitable to increase prices because relatively few customers would be lost.
Merger simulation addresses the practical question of how to measure the size of potential unilateral effects. Using basic economic theory, it analyzes the post-merger market using key relationships involving market shares, price elasticities, and merger-related efficiencies. The economic model yields the unilateral effects as the price changes that are necessary for the market to be in equilibrium when the new firm (and its competitors) act to maximize profits without overt collusion.
The simulation can predict price increases or decreases from a transaction, depending on the configuration of inputs used to calibrate the model. Large shares for the merging parties or relatively large cross-price elasticities between them tend to result in large price effects. Small shares, small cross-price elasticities, and/or large efficiencies tend to produce small or even negative price effects.
This analysis is quite flexible and is able to integrate the traditional Merger Guidelines focus on factors such as market definition, efficiencies, and entry and product repositioning. It can also evaluate the impact of a divestiture, which might be especially useful in designing a "fix it first" strategy. Most importantly, simulation provides a coherent economic framework to analyze options for complex transactions that might otherwise be quite difficult to quantify reliably.
For details on technical issues of specifying and solving a merger simulation model, return to the PCAIDS Support main page and the links to articles given there. |
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