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Antitrust Market Definition and the Sensitivity of the Diversion Ratio

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  • Lydia Cheung

    (School of Economics, Faculty of Business and Law, Auckland University of Technology)

Abstract

The diversion ratio is a key ingredient for merger analysis, as mentioned in the new Horizontal Merger Guidelines (2010) in the U.S. and similar documents abroad. It is a measure of substitutability between merging goods, which determines the potential for price increase post-merger. There is little existing research on how the diversion ratio is to be estimated. This paper is the first one to explore estimation issues through standard demand estimation techniques and how changes in the antitrust market definition affect the resultant diversion ratios. I use random draws of supermarket products from a supermarket dataset to show that the estimated diversion ratios are, in fact, not greatly affected by market definition. They have the same magnitude as baseline estimates and the first significant figures vary within a small range.

Suggested Citation

  • Lydia Cheung, 2016. "Antitrust Market Definition and the Sensitivity of the Diversion Ratio," Working Papers 2016-02, Auckland University of Technology, Department of Economics.
    • Handle: RePEc:aut:wpaper:201602
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    References listed on IDEAS

    as
    1. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    2. Farrell Joseph & Shapiro Carl, 2010. "Upward Pricing Pressure in Horizontal Merger Analysis: Reply to Epstein and Rubinfeld," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-9, September.
    3. Lydia Cheung, 2016. "An Empirical Comparison Between The Upward Pricing Pressure Test Andmerger Simulation In Differentiated Product Markets," Journal of Competition Law and Economics, Oxford University Press, vol. 12(4), pages 701-734.
    4. Adriaan ten KateSr. & Gunnar Niels, 2014. "The Diversion Story: Resolving The Ambiguities Surrounding The Concept Of Diversion Ratio," Journal of Competition Law and Economics, Oxford University Press, vol. 10(2), pages 361-374.
    5. Christopher Conlon & Julie Holland Mortimer, 2021. "Empirical properties of diversion ratios," RAND Journal of Economics, RAND Corporation, vol. 52(4), pages 693-726, December.
    6. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
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    8. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    9. Christopher T. Conlon & Julie Holland Mortimer, 2013. "An Experimental Approach to Merger Evaluation," NBER Working Papers 19703, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Lydia Cheung, 2017. "Brand-level diversion ratios from product-level data," New Zealand Economic Papers, Taylor & Francis Journals, vol. 51(2), pages 177-192, May.

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    More about this item

    Keywords

    horizontal merger; unilateral price effect; difierentiated products; upward pricing pressure; diversion ratio; elasticity;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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