Price Effects Of Mergers Research Articles

Competition in Pricing Algorithms

We document new facts about pricing technology using high-frequency data, and we examine the implications for competition. Some online retailers employ technology that allows for more frequent price changes and automated responses to price changes by rivals. Motivated by these facts, we consider a model in which firms can differ in pricing frequency and choose pricing algorithms that are a function of rivals’ prices. In competitive (Markov perfect) equilibrium, the introduction of simple pricing algorithms can increase price levels, generate price dispersion, and exacerbate the price effects of mergers. (JEL D21, D22, D43, G34, L13, L81)

Seasonal price effects of mergers

This study shows that mergers’ price effects can vary seasonally. I document countercyclical price increases due to the Coors and Miller merger, which is consistent with models of coordinated pricing that predict lower equilibrium prices during high-demand states.

Competition in Pricing Algorithms

We document new facts about pricing technology using high-frequency data, and we examine the implications for competition. Some online retailers employ technology that allows for more frequent price changes and automated responses to price changes by rivals. Motivated by these facts, we consider a model in which firms can differ in pricing frequency and choose pricing algorithms that are a function of rivals’ prices. In competitive (Markov perfect) equilibrium, the introduction of simple pricing algorithms can generate price dispersion, increase price levels, and exacerbate the price effects of mergers.

Best practices for differentiated products demand estimation with PyBLP

AbstractDifferentiated products demand systems are a workhorse for understanding the price effects of mergers, the value of new goods, and the contribution of products to seller networks. Berry, Levinsohn, and Pakes (1995) provide a flexible random coefficients logit model which accounts for the endogeneity of prices. This article reviews and combines several recent advances related to the estimation of BLP‐type problems and implements an extensible generic interface via the PyBLP package. Monte Carlo experiments and replications suggest different conclusions than the prior literature: multiple local optima appear to be rare in well‐identified problems; good performance is possible even in small samples, particularly when “optimal instruments” are employed along with supply‐side restrictions.If Python is installed on your computer, PyBLP can be installed with the following command:pip install pyblp.Up‐to‐date documentation for the package is available athttps://pyblp.readthedocs.io.

The Effect of Functional Form Assumptions on Merger Price Effects in Second-Score Auction Models

Implementing a second-score auction requires specifying a distribution from which suppliers obtain their score draws. In practice, it is often assumed that this is the Gumbel (logit) distribution. We analyze second score models with symmetric firms to illustrate that the assumed distribution has a significant effect on the price change predicted from a merger of two firms. Therefore, sound merger analysis requires testing sensitivity to alternative distributional assumptions or a careful justification for the assumed distribution.

Merger, Product Repositioning and Firm Entry: The Retail Craft Beer Market in California

We study the effects of merger on firm entry, product variety and prices in the retail craft beer market in California. We develop a new method to estimate multiple-discrete choice models in order to recover fixed costs. The method is based on bounds of conditional choice probabilities and does not require solving a game. Using the estimated model, we simulate a counterfactual merger where a large brewery acquires multiple craft breweries. In most markets, we find that new firms enter, non-merging incumbents add products, and merging firms drop products. However, the net effects of product variety from new firm entry and incumbent product portfolio adjustment differ considerably across markets. Larger markets are more likely to see an increase in product variety, which moderates the loss of consumer surplus from the merger's price effects. In a majority of smaller markets, product variety decreases, exacerbating the welfare loss from the price effects.

,,,Paradigm Shifts on Merger Efficiencies in Antitrust Analysis

,,,Paradigm Shifts on Merger Efficiencies in Antitrust Analysis

Competition in Pricing Algorithms

We document new facts about pricing technology using high-frequency data, and we examine the implications for competition. Some online retailers employ technology that allows for more frequent price changes and automated responses to price changes by rivals. Motivated by these facts, we consider a model in which firms can differ in pricing frequency and choose pricing algorithms that are a function of rivals' prices. In competitive (Markov perfect) equilibrium, the introduction of simple pricing algorithms can generate price dispersion, increase price levels, and exacerbate the price effects of mergers.

Efficiency and Price Effects of Mergers in European Union's Trade and Manufacturing Sectors

There are two basic tendencies operating simultaneously in every merger case: i) welfare gains due to efficiency related price reductions and ii) welfare losses associated with rising market power and resulting higher prices for consumers. The question of which will prevail is theoretically ambiguous, and consequently has to be settled empirically. The main objectives of this paper are to explore the effects of mergers on efficiency of consolidated firms, and to study their effects on prices in the trade and manufacturing sectors. To explore the effects of mergers on efficiency and prices we employ both a micro and macro approach by relying on firm-level data in the analysis of efficiency effects and on national-level data in the evaluation of price effects of mergers by using the Difference-in-Difference (DiD) approach on a sample of merger cases regulated by the European Commission (EC) during the 2010-2013 period. The DiD based results show that consolidated firms performed better than their competitors in the second year following the merger. Estimated efficiency gains seem to be led by efficiency growth of merged firms in the manufacturing sector. At the same time, we find evidence that compared to their unaffected counterparts, countries and economic activities in which the consolidation took place experienced a higher associated inflation in the year of the merger. Therefore, our results suggest that price effects unfold in the year when the merger is realized while efficiency effects occur with a delay of two years.

Market Power and Marginal Cost Effects in Competing Markets: Evidence from Airline Mergers

Abstract There are both market power and cost efficiency effects associated with airline mergers. Previous studies, however, have primarily focused on merger price effects, which is the net effect of these two forces. This paper attempts to decompose and measure these effects by using a model that allows us to derive proxies for market power and cost efficiency. In particular, we are interested in merger effects in markets where the merging airlines directly competed prior to their merger. We study two main mergers – Delta/Northwest and United/Continental – and find that both increase market power in markets where the merging airlines competed prior to merger. We also find evidence of marginal cost efficiencies associated with both mergers. These efficiency effects are relatively larger than the market power effects and come from different sources. In the case of the Delta/Northwest merger, efficiencies come from markets where the merging airlines competed prior to the merger, whereas in the case of United/Continental, they come from markets where the merging firms did not compete. The market power effects only stem from markets with pre-existing competition among merging airlines, perhaps due to the elimination of a competitor in those markets. These findings, thus, support the long-standing hypothesis that market power and efficiency are important in motivating horizontal mergers.

Capacity Constraints and Horizontal Merger Effects

This article examines how capacity constraints affect horizontal mergers. Binding capacity constraints for merging firms may mitigate merger price effects, but capacity constraints for nonmerging firms may either amplify or mitigate such effects. The presence of capacity constraints for both the merging and nonmerging firms in a market further complicates the analysis of merger price effects. Capacity constraints may also confound the relationship between market concentration and merger price effects. In addition, capacity constraints affect market definition analysis and analytical tools such as merger simulation and upward pricing pressure indexes. Analyzing the effects of capacity constraints on mergers continues to be a challenge for merger reviews.

Mergers of Capacity-Constrained Firms

Merging firms regularly argue that mergers involving capacity-constrained firms are unlikely to be anti-competitive, because the incentive for the merged firm to raise prices and reduce quantity may not be strong enough to generate slack in the capacity constraints and lead to higher prices. We construct a modified notion of upward pricing pressure called ccGUPPI, or capacity constrained GUPPI, which accounts for the upward prices pressure from binding capacity constraints, in addition to standard merger price effects. ccGUPPI is sufficient to correctly predict whether a merger of capacity-constrained firms will have positive price effects, irrespective of the functional form of demand. Further, using Monte Carlo simulation, we show that ccGUPPI is generally a useful proxy for actual price effects, with lower informational requirements than full merger simulation.

Electricity market mergers with endogenous forward contracting

We analyze the effects of electricity market mergers in an environment where firms endogenously choose their level of forward contracts prior to competing in the wholesale market. We apply our model to Alberta’s wholesale electricity market. Firms have an incentive to reduce their forward contract coverage in the more concentrated post-merger equilibrium. We demonstrate that endogenous forward contracting magnifies the price increasing impacts of mergers, resulting in larger reductions in consumer surplus. Current market screening procedures used to analyze electricity mergers consider firms’ pre-existing forward commitments. We illustrate that ignoring the endogenous nature of firms’ forward commitments can yield biased conclusions regarding the impacts of market structure changes such as mergers. In particular, we show that the price effects of mergers can be largely underestimated when forward contract quantities are held at pre-merger levels. Whether the profits of the merged firm are greater with fixed or endogenous forward quantities is ambiguous.

Upward pricing pressure as a predictor of merger price effects

We use Monte Carlo experiments to evaluate whether “upward pricing pressure” (UPP) accurately predicts the price effects of mergers, motivated by the observation that UPP is a restricted form of the first order approximation derived in Jaffe and Weyl (2013). Results indicate that UPP is quite accurate with standard log-concave demand systems, but understates price effects if demand exhibits greater convexity. Prediction error does not systematically exceed that of misspecified simulation models, nor is it much greater than that of correctly-specified models simulated with imprecise demand elasticities. The results also support that UPP provides accurate screens for anticompetitive mergers.

Brand-level diversion ratios from product-level data

ABSTRACTThe diversion ratio is a key ingredient for merger analysis, as mentioned in the new Horizontal Merger Guidelines (2010) in the US and similar documents abroad. It is a measure of substitutability between merging goods, which determines the potential for price increase post-merger. This paper derives ready-to-use expressions for brand-level aggregated elasticities and diversion ratios, to be used with product-level data. I use the nested logit model and consider three different ways that nested products are grouped into brands, because most brands contain many individual goods, some of which form nests of higher similarity. While rich high-frequency data on the product level become increasingly available, a lot of relevant antitrust analyses, such as merger price effects, are conducted at the brand level. This paper fills a gap in the practitioner's toolkit, valuing ease of use without sacrificing richness of micro-data.

Pass‐Through and the Prediction of Merger Price Effects

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 []. 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.

Electricity Market Mergers with Endogenous Forward Contracting

We analyze the effects of electricity market mergers in an environment where firms endogenously choose their level of forward contracts prior to competing in the wholesale market. We apply our model to Alberta’s wholesale electricity market. Firms have an incentive to reduce their forward contract coverage in the more concentrated post-merger equilibrium. We demonstrate that endogenous forward contracting magnifies the price increasing impacts of mergers, resulting in larger reductions in consumer surplus. Current market screening procedures used to analyze electricity mergers consider firms’ preexisting forward commitments. We illustrate that ignoring the endogenous nature of firms’ forward commitments can yield biased conclusions regarding the impacts of market structure changes such as mergers. In particular, we show that the price effects of mergers can be largely underestimated when forward contract quantities are held at pre-merger levels. Whether the profits of the merged firm are greater with fixed or endogenous forward quantities is ambiguous.

Post-merger Price Variation Matters, So Why Do Merger Retrospectives Ignore It?

The price effect of past mergers has been extensively researched over the past two decades. The overwhelming majority of these studies estimate the over-time average price effect of the merger. Merger guidelines agree that mergers should be approved if market dynamics, such as entry, eliminate negative welfare effects. Estimating price averages ignores key information about the post-merger dynamics of prices and is unable to identify if post-merger prices eventually revert to pre-merger levels. We provide evidence from a set of Monte Carlo experiments to show how serious this problem might be. Firstly, potentially all the studies that concluded - estimating post-merger over-time averages - that the merger led to a price increase, could have been wrong, and in fact the merger price increase disappeared within a reasonable time. Similarly, up to half of the studies that concluded that the merger did not increase prices could have been wrong in their conclusion.

CAN ENTRY OR EXIT EVENT STUDIES INFORM HORIZONTAL MERGER ANALYSIS? EVIDENCE FROM GROCERY RETAILING

This study estimates how prices change following the entry and exit of grocery retailers. We estimate the effects of entry (exit) by comparing affected markets to a set of unaffected markets using both a difference‐in‐difference estimator and a synthetic control estimator. We find that entry typically results in reduced prices. More surprisingly, we find that exit is frequently associated with falling prices. Our estimated effects of entry on grocery prices are similar in magnitude to estimates of merger price effects in the supermarket industry. This finding suggests that entry event studies may be a useful tool for horizontal merger analysis. (JEL L11, L4, L81)

Horizontal Merger Analysis in Retail Markets

In this essay, we describe antitrust analysis of horizontal mergers in U.S. retail markets. We begin by providing a brief overview of the economic and legal framework governing horizontal merger policy, and highlight key issues in analyzing retail mergers. Next, we discuss the changing legal treatment of retailing mergers by providing a description of four major merger challenges brought by U.S. antitrust authorities over the last 50 years. We then provide a detailed discussion of the economic tools used to analyze retailing mergers. We start by presenting a frequently used model of retail competition to illustrate how retail mergers can create or enhance market power. We then describe a variety of structural and reduced form empirical techniques that can be used to quantify competition between merging retailers and, in some cases, to forecast merger price effects.