Wednesday, September 18, 2013
A Random Coefficients Logit Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry
Posted by D. Daniel Sokol
Vivienne Pham (School Economics, La Trobe University) and David Prentice (School of Economics, La Trobe University) describe A Random Coefficients Logit Analysis of the Counterfactual: A Merger and Divestiture in the Australian Cigarette Industry.
ABSTRACT: In this paper we empirically analyse two counterfactual situations facing an antitrust authority following the merger of two of the largest international cigarette companies. First we estimate a random coefficients model of demand for cigarettes. The implied elasticity of demand for smoking and implied marginal costs are consistent with the independent estimates available. We then use the model to simulate the proposed merger and the partial divestiture that was accepted by the Australian antitrust authority. A comparison of the relative price changes predicted by the divestiture simulation with the actual post-divestiture price changes shows that the model is partially successful in predicting the ranking of price changes across companies following the divestiture. This suggests structural econometric analysis using a random coefficients model can provide information for antitrust authorities assessing the implications ! of a potential merger and partial divestiture.