Pass‐Through and the Prediction of Merger Price Effects

27 Pages Posted: 28 May 2020

See all articles by Nathan Miller

Nathan Miller

Georgetown University - McDonough School of Business

Marc Remer

Swarthmore College - Economics Department

Conor Ryan

University of Minnesota

Gloria Sheu

Board of Governors of the Federal Reserve System

Date Written: December 2016

Abstract

We use Monte Carlo experiments to study how pass‐through can improve merger price predictions, focusing on the first order approximation (FOA) proposed in Jaffe and Weyl [[Jaffe, S., 2013]]. FOA addresses the functional form misspecification that can exist in standard merger simulations. We find that the predictions of FOA are tightly distributed around the true price effects if pass‐through is precise, but that measurement error in pass‐through diminishes accuracy. As a comparison to FOA, we also study a methodology that uses pass‐through to select among functional forms for use in simulation. This alternative also increases accuracy relative to standard merger simulation and proves more robust to measurement error.

Suggested Citation

Miller, Nathan and Remer, Marc and Ryan, Conor and Sheu, Gloria, Pass‐Through and the Prediction of Merger Price Effects (December 2016). The Journal of Industrial Economics, Vol. 64, Issue 4, pp. 683-709, 2016, Available at SSRN: https://ssrn.com/abstract=3609404 or http://dx.doi.org/10.1111/joie.12131

Nathan Miller (Contact Author)

Georgetown University - 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

University of Minnesota ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States
7083083723 (Phone)

HOME PAGE: http://https://www.conor-ryan.com/

Gloria Sheu

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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