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The First-Order Approach to Merger Analysis

Sonia Jaffe

Becker Friedman Institute for Research in Economics at the University of Chicago

E. Glen Weyl

Microsoft Research; Yale University

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

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Date posted: February 20, 2011 ; Last revised: April 6, 2013

Suggested Citation

Jaffe, Sonia and Weyl, E. 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

Contact Information

Sonia Jaffe
Becker Friedman Institute for Research in Economics at the University of Chicago ( email )
1101 East 58th Street
Chicago, IL 60637
United States
Eric Glen Weyl (Contact Author)
Microsoft Research ( email )
641 Avenue of the Americas
7th Floor
New York, NY 10011
United States
(857) 998-4513 (Phone)
HOME PAGE: http://www.glenweyl.com
Yale University ( email )
28 Hillhouse Ave
New Haven, CT 06520-8268
United States
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