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Predicting the Price Effect of Mergers with Polynomial Logit Demand

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  • Atanu Saha
  • Peter Simon

Abstract

We propose a polynomial logit model to quantify the price effects of mergers in a static Nash setting. The proposed model is parsimonious in parameters and is shown to have excellent predictive power, rivaling the in-sample and out-of-sample predictive accuracy of the widely-used AIDS model.The analysis, using actual scanner data on bread sales, demonstrates that a linear logit model is likely to over-estimate the merger price effect.

Suggested Citation

  • Atanu Saha & Peter Simon, 2000. "Predicting the Price Effect of Mergers with Polynomial Logit Demand," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(2), pages 149-157.
    • Handle: RePEc:taf:ijecbs:v:7:y:2000:i:2:p:149-157
    DOI: 10.1080/13571510050084497
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    References listed on IDEAS

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    1. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
    2. repec:adr:anecst:y:1994:i:34:p:06 is not listed on IDEAS
    3. Hausman, Jerry & McFadden, Daniel, 1984. "Specification Tests for the Multinomial Logit Model," Econometrica, Econometric Society, vol. 52(5), pages 1219-1240, September.
    4. Werden, Gregory J., 1997. "Simulating The Effects Of Differentiated Products Mergers: A Practitioners' Guide," Strategy and Policy in the Food System: Emerging Issues, June 20-21, 1996, Washington, D.C. 25942, Regional Research Project NE-165 Private Strategies, Public Policies, and Food System Performance.
    5. Werden, Gregory J, 1996. "A Robust Test for Consumer Welfare Enhancing Mergers among Sellers of Differentiated Products," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 409-413, December.
    6. ANDERSON, Simon P. & de PALMA, André & THISSE, Jacques-François, 1992. "Interpretations of the logit discrete choice models and the theory of product differentiation," LIDAM Reprints CORE 1017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Philip Crooke & Luke Froeb & Steven Tschantz & Gregory Werden, 1999. "Effects of Assumed Demand Form on Simulated Postmerger Equilibria," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 15(3), pages 205-217, November.
    8. Werden, Gregory J & Froeb, Luke M, 1994. "The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 10(2), pages 407-426, October.
    9. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
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    Cited by:

    1. Geoffrey Pofahl, 2009. "Merger Simulation in the Presence of Large Choice Sets and Consumer Stockpiling: The Case of the Bottled Juice Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 34(3), pages 245-266, May.
    2. Geoffrey Pofahl & Oral Capps & H. Alan Love, 2006. "Retail Zone Pricing and Simulated Price Effects of Upstream Mergers," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(2), pages 195-215.

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