On the Risk of Using a Firm-Level Approach to Identify Relevant Markets
21 Pages Posted: 16 Nov 2020
Date Written: September 28, 2020
In a recent influential paper Coate et al. (2020) have criticized the standard firm-level approach to market definition in merger review. They argue why a market-level approach to critical loss is more appropriate than a firm-level critical loss analysis. Their conclusion is that under certain plausible demand scenarios --- i.e., non-linearity of demand functions --- a diversion-based firm-level analysis could easily reach the wrong answer on market definition. We extend their analysis by showing that in standard environments used by the most recent theoretical and empirical academic work on merger analysis (namely CES and logit demand functions), a firm level approach actually leads to an excessively narrow market definition as opposed to a market-level approach, thereby increasing the risk of type I errors.
Keywords: Critical Loss Analysis, Firm- and Market-level Approach, Mergers, Non-linear Demand
JEL Classification: D43, G34, L4, L13
Suggested Citation: Suggested Citation