Wednesday, April 16, 2008
Posted by D. Daniel Sokol
Maybe mergers are not as anti-competitive as we might otherwise assume. This is a finding in an excellent new article by Amit Gandhi (Department of Economics, University of Wisconsin-Madison), Luke Froeb (Owen Graduate School of Management, Vanderbilt University), Steven Tschantz (Department of Mathematics, Vanderbilt University) and Greg Werden (DOJ Antitrust) on Post Merger Product Repositioning.
ABSTRACT: 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 firm's 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.