Wednesday, August 8, 2012
Posted by D. Daniel Sokol
Jonas Bjornerstedt (Swedish Competition Authority) and Frank Verboven (Leuven) ask Does merger simulation Work? A “natural experiment” in the Swedish analgesics market.
ABSTRACT: We exploit a natural experiment associated with a large merger in the Swedish market for analgesics (painkillers). We confront the predictions from a merger simulation study, as conducted during the investigation, with the actual merger effects over a two-year comparison window. The merger simulation model is based on a constant expenditures specification for the nested logit model (as an alternative to the typical unit demand specification). The model predicts a large price increase of 34 percent by the merging firms, because there is strong market segmentation and the merging firms are the only competitors in the largest segment. The actual price increase after the merger is of a similar order of magnitude: +42 percent in absolute terms and +35 percent relative to the “control group” of non-merging rivals. These findings suggest strong support for merger simulation and structural models of competition more generally. But a closer look at a wider range of merger predictions leads to more nuanced conclusions. First, both merging firms raised their prices by a similar percentage, while the simulation model predicted a larger price increase for the smaller firm. Second, the merging firms’ market shares dropped (as predicted), but one of the outsider firms’ market share also dropped (because it raised prices by a larger amount than predicted).