Approximating the Price Effects of Mergers: Numerical Evidence and an Empirical Application

Economic Analysis Group Discussion Paper EAG-12-8

50 Pages Posted: 15 Nov 2012

See all articles by Nathan Miller

Nathan Miller

Georgetown University - Robert Emmett McDonough School of Business

Marc Remer

Swarthmore College - Economics Department

Conor Ryan

affiliation not provided to SSRN

Gloria Sheu

Government of the United States of America - Department of Justice

Date Written: October 2012

Abstract

We analyze the accuracy of first order approximation, a method developed theoretically in Jaffe and Weyl (2012) for predicting the price effects of mergers, and provide an empirical application. Approximation is an alternative to the model-based simulations commonly employed in industrial economics. It provides predictions that are free from functional form assumptions, using data on either cost pass-through or demand curvature in the neighborhood of the initial equilibrium. Our numerical experiments indicate that approximation is more accurate than simulations that use incorrect structural assumptions on demand. For instance, when the true underlying demand system is logit, approximation is more accurate than almost ideal demand system (AIDS) simulation in 79.1 percent of the randomly-drawn industries and more accurate than linear simulation in 90.3 percent of these industries. We also develop, among other results, (i) how accuracy changes across a variety of economic environments, (ii) how accuracy is affected by incomplete data on cost pass-through, and (iii) that a simplified version of approximation provides conservative predictions of price increases.

Keywords: approximation, merger simulation, cost pass-through

JEL Classification: K21, L13, L41

Suggested Citation

Miller, Nathan and Remer, Marc and Ryan, Conor and Sheu, Gloria, Approximating the Price Effects of Mergers: Numerical Evidence and an Empirical Application (October 2012). Economic Analysis Group Discussion Paper EAG-12-8. Available at SSRN: https://ssrn.com/abstract=2175100 or http://dx.doi.org/10.2139/ssrn.2175100

Nathan Miller (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

Marc Remer

Swarthmore College - Economics Department ( email )

Swarthmore, PA 19081
United States

Conor Ryan

affiliation not provided to SSRN ( email )

Gloria Sheu

Government of the United States of America - Department of Justice ( email )

Register to save articles to
your library

Register

Paper statistics

Downloads
67
Abstract Views
840
rank
332,858
PlumX Metrics