A Price Leadership Model for Merger Analysis

Abstract

We provide a methodology to simulate the coordinated effects of a proposed merger using data commonly available to antitrust authorities. The model follows the price leadership structure in Miller, Sheu, and Weinberg (2021) in an environment with logit or nested logit demand. The model calibration leverages profit margin data to separately identify the extent of coordinated pricing from marginal costs. Using this framework, we demonstrate how mergers can shift incentive compatibility constraints and thereby lead to adverse competitive effects. The incentive compatibility constraints also affect the extent to which cost efficiencies and divestitures mitigate competitive harms.

Keywords: merger simulation, price leadership, coordinated effects, collusion