Friday, January 18, 2019
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.