Does Merger Simulation Work? A 'Natural Experiment' in the Swedish Analgesics Market

Katholieke Universiteit Leuven Discussion Paper Series 12.08

38 Pages Posted: 16 Jul 2012

See all articles by Jonas Bjornerstedt

Jonas Bjornerstedt

Research Institute of Industrial Economics (IFN)

Frank Verboven

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: June 1, 2012

Abstract

We exploit a natural experiment associated with a large merger in the Swedish market for analgesics (painkillers). We confront the predictions from a merger simulation study, as conducted during the investigation, with the actual merger effects over a two-year comparison window. The merger simulation model is based on a constant expenditures specification for the nested logit model (as an alternative to the typical unit demand specification). The model predicts a large price increase of 34% by the merging firms, because there is strong market segmentation and the merging firms are the only competitors in the largest segment. The actual price increase after the merger is of a similar order of magnitude: 42% in absolute terms and 35% relative to the “control group” of non-merging rivals. These findings suggest strong support for merger simulation and structural models of competition more generally. But a closer look at a wider range of merger predictions leads to more nuanced conclusions. First, both merging firms raised their prices by a similar percentage, while the simulation model predicted a larger price increase for the smaller firm. Second, the merging firms’ market shares dropped (as predicted), but one of the outsider firms’ market share also dropped (because it raised prices by a larger amount than predicted).

Keywords: merger simulation, ex post merger evaluation, constant expenditures nested logit, analgesics or painkillers

Suggested Citation

Bjornerstedt, Jonas and Verboven, Frank, Does Merger Simulation Work? A 'Natural Experiment' in the Swedish Analgesics Market (June 1, 2012). Katholieke Universiteit Leuven Discussion Paper Series 12.08. Available at SSRN: https://ssrn.com/abstract=2109318 or http://dx.doi.org/10.2139/ssrn.2109318

Jonas Bjornerstedt (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 5501
S-114 85 Stockholm
Sweden
+46 8 665 4521 (Phone)
+46 8 665 4599 (Fax)

Frank Verboven

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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