Knowledge (XXG)

Merger simulation

Source πŸ“

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Modelling the estimated demand requires selecting the demand model that best suits consumer behaviour in the industry, and either functional form models (AIDS, PCAIDS) or discrete-form models (Logit, Nested Logit) can be used. Additionally, the demand elasticity of the product(s) and how consumers in
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The sign of the net effect on welfare from a small outwards shift in an individual firm's reaction curves function is given by the difference between that firm's market share and the sum total of each of the other firms reaction functions multiplied by their individual market shares. In a market with
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If there is a merger between colluding firms such that it their initial market share is not greater than the outsiders, the price and marginal cost functions are non-negative in the 2nd and 3rd order for all the outsider firms, then if the merger is profitable and would raise the price, then it would
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If sub-sect of colluding firms within a Cournot oligopolistic market change their behaviour, then their net effect on the other firms and customer is a function of the equilibrium change (XI) of the colluder's output. A small reduction in XI has a net positive effect on outsiders and customers if the
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Each firm's reaction curves slope downwards, such that an increase in a rivals’ output lowers the firm's marginal revenue. This assumption is made as if marginal revenues were unaffected by the others output, the equilibrium would not be a function of quantity. Which is necessary for application of
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Reducing imports by a quota will raise domestic welfare if and only if the share of imports are less than the reaction-weighted sum of domestic producers shares. This means for a sufficiently small import sector, excluding all imports will raise welfare. This is due to the lower marginal cost of
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4. Model of the new equilibrium after the merger using the demand and supply models pre-merger. This is done by using the previous functions to calculate the firms' equilibrium price after the merger has happened, and calculating the consequent welfare effects.
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large rival firms, a sufficiently small entrant will have a net negative effect on welfare, as the market share taken from other firms is at a higher marginal cost than the increase in customer welfare. Therefore, overall welfare decreases.
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They sought to instead to model mergers by Cournot oligopoly theory, establishing a series of propositions in both mergers effect on price and welfare. To establish their propositions a series of assumptions and conditions were made:
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When assessing the welfare effects of a vertical merger, both the upstream and downstream game effects must be considered. Therefore, it is an extension of the horizontal merger model consisting of five elements.
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Farrell and Shapiro (1990) highlighted issues of the US Department of Justice's Merger Guidelines (1984), with its use of Herfindahl-Hirschman indices. The main issues they raised were the base assumptions that:
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Depending on the state of their competition, firms' objectives may align. For example, firms may have a mutual understanding to not produce too much output as it may decrease their prices.
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A merger raises its price if and only if the merged company markup is less than the sum of the pre-merger constituent markups, and the post-merger aggregate quantity is unchanged.
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Each firm's residual demand curve intersects above its marginal cost curve. This assumption is made as if marginal cost decreased with quantity, as it can in some cases with
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Werden, Gregory (1997). "Simulating the effects of differentiated products mergers: a practical alternative to structural merger policy".
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Demand elasticities are not to be treated as a constant as they may significantly vary for various products after the merger occurs.
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between firms. Merger simulation models differ with respect to assumed form of competition that best describes the market (e.g.
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The firm's marginal costs are taken into account, as well as factors that may influence it, such as diseconomies of scale.
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The steps in the merger simulation process can be divided into two categories: "front-end" and "back-end" analysis.
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domestic producers generating a larger welfare gain than the customer welfare loss due to domestic price increases.
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Peters, Craig (2006). "Evaluating the Performance of Merger Simulation: Evidence from the U.S. Airline Industry".
31:, auction models, etc.) as well as the structure of the chosen demand system (e.g. linear or log-linear demand, 85:. Based on the assumptions, they established 7 propositions relating to price and welfare outcomes of mergers. 81:
These conditions favour accuracy of the modelling in markets with limited demand and products that do not have
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Slade, Margaret (2021). "Vertical Mergers: A Survey of Ex Post Evidence and Ex Ante Evaluation Methods".
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All merging firms are equally efficient, and their long-run production has constant returns to scale.
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The strategic variable(s) the firm would focus on and modify in order to compete with its rivals.
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There is a reliable and inverse relationship between market concentration) and market performance.
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Outputs remain unchanged in the merger process (both companies retained their initial outputs);
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total outsider market share and response function are larger than the colluder's market share.
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the industry select which products they wish to consume will also need to be estimated.
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If a merger generates no synergies, then in the long run it causes market price to rise.
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Budzinski, O; Ruhmer, I (2010). "Merger simulation in competition policy: A survey".
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is a commonly used technique when analyzing potential welfare costs and benefits of
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If a merger generates no synergies, then in the short run it will raise price if:
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When carrying out merger simulation, there are three key assumptions to be held:
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The following elements are used to simulate the effects of a merger.
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Domneko, Gleb; Sibley, David (2023). "Simulating Vertical Mergers".
523:, Journal of Competition Law & Economics (2010), 6(2): 277–319. 376: 285:, Journal of Competition Law & Economics (2010), 6(2): 277-319. 32: 266:
of the simulation because the game will be modelled vertically.
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Quantitative Techniques for Competition and Antitrust Analysis
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2. Specification of parameters in the demand function.
77:, then there may be no Cournot equilibrium solution. 254:The simulations can then be either econometric or 245:3. Assumption with respect to the downstream game 521:Merger Simulation in Competition Policy: A Survey 283:Merger Simulation in Competition Policy: A Survey 242:2. Assumption with respect to the upstream game 159:3. Model of the supply side before the merger. 297:"Horizontal Mergers: An Equilibrium Analysis" 295:Farrell, Joseph; Shapiro, Carl (March 1990). 8: 148:1. Estimation of demand before the merger. 328:Journal of Competition Law & Economics 384: 347: 221:Bertrand competition is commonly assumed 408:Davis, Peter; Garce ́s, Eliana (2010). 274: 103:Capital is immobile across facilities; 248:4. Assumption of the timing of moves 7: 519:Oliver Budzinski and Isabel Ruhmer, 281:Oliver Budzinski and Isabel Ruhmer, 219:The firms' oligopoly interactions. ( 25:differentiated Bertrand competition 14: 489:Review of Industrial Organization 454:Review of Industrial Organization 365:The Journal of Law and Economics 1: 301:The American Economic Review 264:subgame perfect equilibrium 553: 501:10.1007/s11151-023-09896-z 466:10.1007/s11151-020-09795-7 231:Vertical merger simulation 113:Welfare-based propositions 37:almost ideal demand system 262:will be used to find the 537:Mergers and acquisitions 89:Price-based propositions 435:George Mason Law Review 216:Constant marginal cost 340:10.1093/joclec/nhp014 315:– via ProQuest. 239:1. Downstream demand 192:Strategic variables 123:also raise welfare. 29:Cournot competition 260:Backward induction 251:5. Marginal Costs 144:Front-end analysis 83:economies of scale 75:economies of scale 43:Simulation methods 419:978-0-691-14257-9 175:Demand estimation 155:Back-end analysis 48:Cournot oligopoly 17:Merger simulation 544: 513: 512: 484: 478: 477: 449: 443: 442: 430: 424: 423: 405: 399: 398: 388: 360: 354: 353: 351: 323: 317: 316: 292: 286: 279: 552: 551: 547: 546: 545: 543: 542: 541: 527: 526: 516: 486: 485: 481: 451: 450: 446: 432: 431: 427: 420: 407: 406: 402: 362: 361: 357: 325: 324: 320: 294: 293: 289: 280: 276: 272: 233: 210: 208:Key assumptions 202: 194: 186: 177: 169: 157: 146: 138: 115: 91: 70:Cournot theory. 50: 45: 12: 11: 5: 550: 548: 540: 539: 529: 528: 525: 524: 515: 514: 479: 460:(4): 493–511. 444: 425: 418: 400: 377:10.1086/505369 371:(2): 627–649. 355: 334:(2): 277–319. 318: 287: 273: 271: 268: 232: 229: 228: 227: 224: 217: 209: 206: 201: 198: 193: 190: 185: 182: 176: 173: 168: 165: 156: 153: 145: 142: 137: 134: 133: 132: 128: 124: 120: 114: 111: 110: 109: 108: 107: 104: 98: 95: 90: 87: 79: 78: 71: 62: 61: 58: 49: 46: 44: 41: 39:(AIDS), etc.) 13: 10: 9: 6: 4: 3: 2: 549: 538: 535: 534: 532: 522: 518: 517: 510: 506: 502: 498: 495:(2): 99–118. 494: 490: 483: 480: 475: 471: 467: 463: 459: 455: 448: 445: 441:(3): 363–386. 440: 436: 429: 426: 421: 415: 411: 404: 401: 396: 392: 387: 382: 378: 374: 370: 366: 359: 356: 350: 345: 341: 337: 333: 329: 322: 319: 314: 310: 306: 302: 298: 291: 288: 284: 278: 275: 269: 267: 265: 261: 257: 252: 249: 246: 243: 240: 237: 230: 225: 222: 218: 215: 214: 213: 207: 205: 199: 197: 191: 189: 184:Cost function 183: 181: 174: 172: 167:General model 166: 164: 160: 154: 152: 149: 143: 141: 135: 129: 125: 121: 117: 116: 112: 105: 102: 101: 99: 96: 93: 92: 88: 86: 84: 76: 72: 68: 67: 66: 59: 56: 55: 54: 47: 42: 40: 38: 34: 30: 26: 22: 18: 520: 492: 488: 482: 457: 453: 447: 438: 434: 428: 409: 403: 368: 364: 358: 331: 327: 321: 304: 300: 290: 282: 277: 253: 250: 247: 244: 241: 238: 234: 220: 211: 203: 195: 187: 178: 170: 161: 158: 150: 147: 139: 80: 63: 51: 16: 15: 386:10419/23462 349:10419/82794 256:Monte Carlo 200:Competition 270:References 509:256866350 474:211730772 395:222325804 313:233048205 531:Category 309:ProQuest 307:: 107. 136:Process 21:mergers 507:  472:  416:  393:  311:  505:S2CID 470:S2CID 391:S2CID 33:logit 414:ISBN 497:doi 462:doi 381:hdl 373:doi 344:hdl 336:doi 533:: 503:. 493:62 491:. 468:. 458:58 456:. 437:. 389:. 379:. 369:49 367:. 342:. 330:. 305:80 303:. 299:. 258:. 35:, 27:, 511:. 499:: 476:. 464:: 439:5 422:. 397:. 383:: 375:: 352:. 346:: 338:: 332:6 223:)

Index

mergers
differentiated Bertrand competition
Cournot competition
logit
almost ideal demand system
economies of scale
economies of scale
Monte Carlo
Backward induction
subgame perfect equilibrium
"Horizontal Mergers: An Equilibrium Analysis"
ProQuest
233048205
doi
10.1093/joclec/nhp014
hdl
10419/82794
doi
10.1086/505369
hdl
10419/23462
S2CID
222325804
ISBN
978-0-691-14257-9
doi
10.1007/s11151-020-09795-7
S2CID
211730772
doi

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