Gregory J. Werden

A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products

Recently developed tools are used to predict the effects of differentiated products mergers, but they require the assumption of a particular functional form for industry demand, and any assumption is vulnerable to attack. This paper demonstrates that marginal cost reductions necessary to restore premerger prices can be calculated without making any assumption about demand, and it provides a robust and practical method for determining whether a particular merger enhances consumer welfare.

Endogeneity in the Concentration-Price Relationship: Causes, Consequences, and Cures

The ordinary least squares estimator of the effect of concentration on price is biased for two reasons. First, performance feeds back into structure, causing a simultaneous equations bias. Second, as a function of outputs or revenues, measured concentration is correlated with determinants of price that are, at best, measured with error, so measured concentration is correlated with the error term. With panel data, fixed-effects procedures can be combined with instrumental variables to eliminate bias from both sources. In concentration-price regressions for the airline industry, the bias can be substantial and negative. Copyright 1993 by Blackwell Publishing Ltd.

Post-Merger Product Repositioning

This paper analyzes the effects of mergers between firms competing by simultaneously choosing price and location. Products combined by a merger are repositioned away from each other to reduce cannibalization, and non-merging substitutes are, in response, repositioned between the merged products. This repositioning greatly reduces the merged firms incentive to raise prices and thus substantially mitigates the anticompetitive effects of the merger. Computation of, and selection among, equilibria is done with a novel technique known as the stochastic response dynamic, which does not require the computation of first-order conditions.

Correlation, Causality, and all that Jazz: The Inherent Shortcomings of Price Tests for Antitrust Market Delineation

A substantial economics literature has developed in which price data have been relied upon to delineate antitrust markets by empirically implementing definitions offered by classical economists. The forces driving these price tests are not the same as those that give rise to market power, and therefore these price tests are likely to reach erroneous conclusions if used to delineate antitrust relevant markets. The price tests should be used with great caution, if at all.

Simulation as an Alternative to Structural Merger Policy in Differentiated Products Industries

Public policy toward horizontal mergers, as embodied in the case law and in the Horizontal Merger Guidelines issued in 1992 by the U.S. Department of Justice and Federal Trade Commission, is primarily structural. Relevant markets are first delineated; market shares are assigned; and particular market shares and levels of market concentration give rise to presumptions of illegality. While the presumptions can be overcome and there is much more than this to merger analysis, market delineation and market shares remain the heart and soul of horizontal merger policy. As the Supreme Court recently noted, “market definition generally determines the result of the case.”3

Entry, exit, and performance in airline markets

Abstract Data from the airline industry indicate that: (1) entry generally is not induced by price levels substantially above the norm; (2) entry reduces fares and increases output, and exit increases fares and reduces output; and (3) incumbents cut price and maintain output in response to entry, and survivors increase both price and output in response to exit. These findings cast doubt on the ability of entry to prevent or reverse price increases from anticompetitive mergers.

The limited relevance of patient migration data in market delineation for hospital merger cases.

A model is presented in which hospitals and patients exist at two points and in which a significant number of patients migrate from one point to the other because of perceived quality differences. Applying a market delineation test based on patient migration, such as the Elzinga-Hogarty test, this migration would lead to the conclusion that the relevant market for purposes of antitrust analysis includes both points. This conclusion is shown to be incorrect because a monopolist at the higher quality point generally would raise price significantly.

A Robust test for Consumer Welfare Enhancing Mergers Among Sellers of a Homogeneous Product

Antiturst enforcement agencies and courts use net effect on price as a touchstone for the legality of mergers. This paper derives a simple, and completely general, condition for implementing that standard when industry equilibrium is static Nash in qualities (Cournot).

The Effect of Antitrust Policy on Consumer Welfare: What Crandall and Winston Overlook

Robert Crandall and Clifford Winston set out to review and enlarge the body of scholarly evidence on the effect of antitrust policy on consumer prices. They ignore, however, the great weight of evidence supporting the two core elements of antitrust policy - criminal prosecution of cartel activity and challenging anticompetitive horizontal mergers. And their original empirical analysis relating to merger enforcement suffers from such serious methodological flaws that it sheds no new light on the issues.

Residual demand estimation for market delineation: Complications and limitations

To shed some light on market delineation in an antitrust context, many economists are turning to estimates of residual demand elasticities. Recent papers have drawn attention to the importance of demand curve in market delineation and explained how they can be estimated. This paper shows that there are many complications and limitations of the approach. The relationship between the residual demand elasticity and the scope of the relevant market is complicated and depends on behavioral assumptions. The residual demand elasticity that can be estimated is not the one on which market delineation turns. The estimation of residual demand elasticities can be very difficult because of the complex dynamics of consumer behavior. Finally, residual demand estimators are likely to have a high variance because of instrument problems and this is likely to lead to widely varying estimates depending on specification choices.