Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Friday, June 18, 2010

Unilateral Effects for Differentiated Products: Theory, Assumptions, and Research

Posted by D. Daniel Sokol

David Scheffman (Conerstone Research) and Joseph Simons (Paul Weiss) have written an interesting article on Unilateral Effects for Differentiated Products: Theory, Assumptions, and Research.

ABSTRACT: Oocus of the potential revision of the Department of Justice and Federal Trade Commission Horizontal Merger Guidelines is unilateral effects analysis in markets with differentiated products. Unilateral effects analysis was first introduced to the Guidelines in the 1992 revisions. The reliability of the predictions of post-merger prices arising from the economic models underlying that unilateral effects analysis, however, has been the subject of substantial controversy. Specifically, it has long been well known that these models predict that any merger between sellers of competing differentiated products will lead to a price increase absent offsetting efficiencies.

There has been considerable discussion, including recently, of what role these underlying economic models should have, including potentially superseding market definition and providing a presumption of anticompetitive effects. In our view, reliance on these models for either purpose is not justified. We will explain in this article that the theoretical economic models underlying the Guidelines unilateral effects analysis for differentiated products make a subtle, but strong and critical mathematical assumption that is not likely to be satisfied in real world situations. Without this assumption, the prediction of price increases based on margins and diversion ratios or simulations, as suggested by these models, is not justified.

Download Scheffman_Simons_ATSource_Apr10[1]

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