Friday, May 2, 2008
Posted by D. Daniel Sokol
ABSTRACT: Economists have analyzed incumbent responses to entry and exit by competitors as probative of competitive effects in several recent high profile mergers. This chapter argues that an incumbent's response to entry or exit may be probative of competitive effects of merger because these responses reveal whether premerger pricing is competitive and, therefore, whether the elimination of one competitive constraint through merger is likely to change competitive outcomes. This interpretation contrasts with the more common interpretation that simulates postmerger prices by equating the effects of entry and exit with merger. Such simulation may either overstate or understate the effects of merger, depending on the circumstances. This chapter also considers two types of issues that may arise in entry and exit event analysis. The first is in the interpretation of the estimated causal effects of entry and exit on incumbents. The second is in the estimation of these effects.