The First-Order Approach to Merger Analysis

American Economic Journal: Microeconomics, Forthcoming

Harvard Economics Department Working Paper

32 Pages Posted: 20 Feb 2011 Last revised: 6 Apr 2013

See all articles by Sonia Jaffe

Sonia Jaffe

University of Chicago

E. Glen Weyl

Microsoft ; RadicalxChange Foundation

Date Written: January 7, 2013

Abstract

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.

Keywords: horizontal merger guidelines, comparative statics, local approximation

JEL Classification: D43, K21, L41

Suggested Citation

Jaffe, Sonia and Weyl, Eric Glen, The First-Order Approach to Merger Analysis (January 7, 2013). American Economic Journal: Microeconomics, Forthcoming, Harvard Economics Department Working Paper, Available at SSRN: https://ssrn.com/abstract=1765024 or http://dx.doi.org/10.2139/ssrn.1765024

Sonia Jaffe

University of Chicago ( email )

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Eric Glen Weyl (Contact Author)

Microsoft ( email )

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HOME PAGE: http://www.glenweyl.com

RadicalxChange Foundation ( email )

HOME PAGE: http://www.radicalxchange.org

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