Scandinavian Working Papers in Economics

Discussion Paper Series in Economics,
Norwegian School of Economics, Department of Economics

No 27/2010: Merger simulations with observed diversion ratios.

Lars Mathiesen (), Øivind Anti Nilsen () and Lars Sørgard ()
Additional contact information
Lars Mathiesen: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Øivind Anti Nilsen: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway
Lars Sørgard: Dept. of Economics, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Economics, Helleveien 30, N-5045 Bergen, Norway

Abstract: A common approach to merger simulations used in antitrust cases is to calibrate demand from market shares and a few additional parameters. When the products involved in the merger case are differentiated along several dimensions, the resulting diversion ratios may be very different from those based upon market shares. This again may affect the predicted post-merger price effects. This article shows how merger simulation can be improved by using observed diversion ratios. To illustrate the effects of this approach we use diversion ratios from a local grocery market in Norway. In this case diversions from the acquired to the acquiring stores were considerably smaller than suggested by market shares, and the predicted average price increase from the acquisition was 40 % lower using this model rather than a model based upon market shares. This analysis also suggests that even a subset of observed diversion ratios may significantly change the prediction from a merger simulation based upon market shares.

Keywords: Merger simulation; diversion ratio; asymmetric differentiation; merger policy.

JEL-codes: K21; L11; L41

31 pages, September 30, 2010

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