Merger Simulations with Observed Diversion Ratios

33 Pages Posted: 26 Oct 2010  

Lars Mathiesen

Norwegian School of Economics (NHH) - Department of Economics

Øivind Anti Nilsen

Norwegian School of Economics (NHH) - Department of Economics; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Lars Sorgard

Norwegian School of Economics and Business Administration (NHH); Norwegian School of Economics (NHH) - Department of Economics

Date Written: September 30, 2010

Abstract

A common approach to merger simulations used in antitrust cases is to calibrate demand from market shares and a few additional parameters. When the products involved in the merger case are differentiated along several dimensions, the resulting diversion ratios may be very different from those based upon market shares. This again may affect the predicted post-merger price effects. This article shows how merger simulation can be improved by using observed diversion ratios. To illustrate the effects of this approach we use diversion ratios from a local grocery market in Norway. In this case diversions from the acquired to the acquiring stores were considerably smaller than suggested by market shares, and the predicted average price increase from the acquisition was 40 % lower using this model rather than a model based upon market shares. This analysis also suggests that even a subset of observed diversion ratios may significantly change the prediction from a merger simulation based upon market shares.

Keywords: Merger Simulation, Diversion Ratio, Asymmetric Differentiation, Merger Policy

JEL Classification: K21, L11, L41

Suggested Citation

Mathiesen, Lars and Nilsen, Øivind Anti and Sorgard, Lars, Merger Simulations with Observed Diversion Ratios (September 30, 2010). NHH Dept. of Economics Discussion Paper No. 27/2010. Available at SSRN: https://ssrn.com/abstract=1698166 or http://dx.doi.org/10.2139/ssrn.1698166

Lars Mathiesen

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Oivind Anti Nilsen (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Lars Sorgard

Norwegian School of Economics and Business Administration (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 5 595 9723 (Phone)
+47 5 595 9543 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

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