Tuesday, January 4, 2022

Merger efficiencies and price effects in differentiated Cournot oligopoly

Merger efficiencies and price effects in differentiated Cournot oligopoly

Jeremy Sandford

Compass Lexecon


Suppose differentiated firms compete in quantities. This paper derives a formula for the minimum cost savings that would offset the incentive to increase price created by a merger. The formula depends only on pre-merger information on margins and demand slopes, and is invariant to demand and cost curvature. The paper then develops an algorithm to infer demand slopes -- and thus allow calibration of parameterized demand and cost curves -- from pre-merger data. While the Cournot model of quantity competition is commonly accompanied by an assumption that rivals' products are interchangeable, the inflexibility of this assumption and its implications opens the model to criticisms. The paper examines the advantages of relaxing the assumption of interchangeability, in particular greater consistency with pre-merger data and greater scope for profitable mergers. An extended numerical example illustrates the application of a differentiated Cournot model to a hypothetical industry.


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