Unilateral Effects with Differentiated Consumer Products: A Response to Werden

Posted by D. Daniel Sokol

Dave Scheffman (Cornerstone Research and Vanderbilt Owen School) and Joe Simons (Paul Weiss) respond to DOJ's Greg Werden with their article Unilateral Effects with Differentiated Consumer Products: A Response to Werden.

ABSTRACT: In the April 2010 issue of The Antitrust Source, we explained that the theoretical economic models underlying the Merger Guidelines’ treatment of unilateral effects for differentiated products make a technical mathematical assumption (“differentiability”) that leads to a mathematical result that the own-price elasticity of demand can be computed using only the margin (i.e., the “Lerner Equation”). This mathematical result, in turn, leads to the general result that all horizontal mergers involving “differentiated products” are predicted to increase prices due to anticompetitive unilateral effects, absent offsetting efficiencies. This extreme result is a mathematical theoretical curiosity, not an acceptable basis for a presumption. As we explained, the technical assumption and its result are contradicted by empirical consumer and economic research and by everyday experience. In his June 2010 response to our article, Gregory Werden challenged some of our analysis with respect to research on consumer demand, asymmetric competitor responses, and the significance of our example of “kinked demand.” We now reply.