Antitrust & Competition Policy Blog

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

Friday, January 18, 2019

Empirical Properties of Diversion Ratios

Christopher T. Conlon and Julie Holland Mortimer write on Empirical Properties of Diversion Ratios.

Abstract: A diversion ratio, which measures the fraction of consumers that switch from one product to an alternative after a price increase, is a central calculation of interest to antitrust authorities for analyzing horizontal mergers. Two ways to measure diversion are: the ratio of estimated cross-price to own-price demand derivatives, and second-choice data. Policy-makers may be interested in either, depending on whether they are concerned about the potential for small but widespread price increases, or product discontinuations. We estimate diversion in two applications -- using observational price variation and experimental second-choice data respectively -- to illustrate the trade-offs between different empirical approaches. Using our estimates of diversion, we identify candidate products for divestiture in a hypothetical merger.

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