The First-Order Approach to Merger Analysis
Becker Friedman Institute for Research in Economics at the University of Chicago
E. Glen Weyl
Microsoft Research New England; University of Chicago
January 7, 2013
American Economic Journal: Microeconomics, Forthcoming
Harvard Economics Department Working Paper
Using information local to the pre-merger equilibrium, we derive approximations of the expected changes in prices and welfare generated by a merger. We extend the pricing pressure approach of recent work to allow for non-Bertrand conduct, adjusting the diversion ratio and incorporating the change in anticipated accommodation. To convert pricing pressures into quantitative estimates of price changes, we multiply them by the merger pass-through matrix, which (under conditions we specify) is approximated by the pre-merger rate at which cost increases are passed through to prices. Weighting the price changes by quantities gives the change in consumer surplus.
Number of Pages in PDF File: 32
Keywords: horizontal merger guidelines, comparative statics, local approximation
JEL Classification: D43, K21, L41
Date posted: February 20, 2011 ; Last revised: April 6, 2013
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