Merger Simulations

Abstract

The key in an evaluation of a proposed merger is to determine whether the reduction of competition it would cause is outweighed by potential cost reductions. Traditional analysis of mergers is primarily based on industry-concentration measures. A market is defined and market shares of the relevant firms are used to compute a pre-merger concentration measure as well as a change in this measure due to the merger. Both the pre-merger level and the change in concentration are then compared with preset levels. The intuition is that, if the industry is concentrated, or if the change in concentration is large, then the anti-competitive effect will dominate. Using this approach to evaluate mergers in some industries is problematic for at least two reasons. In many cases the product offerings make the definition of the relevant product (or geographic) market difficult. Even if the relevant market can be defined, the computed concentration index provides a reasonable standard by which to judge the competitive effects of the merger only under strong assumptions.