Essays on horizontal merger simulation: the curse of dimensionality, retail price discrimination, and supply channel stage-games

• Main Author: Pofahl, Geoffrey Michael
• Other Authors: Capps, Oral Jr.
• Format: Others
• Language: en_US
• Published: Texas A&M University 2007
• Subjects: merger simulation
• Online Access: http://hdl.handle.net/1969.1/4833

In the words of Joel I. Klein, former Assistant Attorney General of the United States, “[a]ntitrust enforcement in the merger area has never been as time-consuming, complex, or as central to the functioning of our economy as it is today” (Klein, 1998). As such, the development of transparent, efficient, and accurate merger analysis tools is an endeavor whose value continues to increase in the eyes of regulators and industry participants alike. Arguably, the most visible result of such endeavors is the emergence and advancement of a practice known as merger simulation. The first goal of this dissertation is to evaluate the merits of the Distance Metric (DM) demand model and its usefulness in merger simulations. Revered by its creators as easy-to-use, flexible, and able to handle large numbers of products, the DM approach has not received the “road-testing” necessary for establishing its practical usefulness. The DM model is used to estimate demand elasticities for 45 bottled-juice products. Elasticities are then used to simulate numerous hypothetical mergers. While adding validity to the alleged strengths of the DM approach, an additional contribution is made by demonstrating the robustness of merger simulation results across 22 DM specifications. Despite the oft-recognized reality of zone pricing by food retailers, this form of price discrimination has received little attention within the context of upstream merger analysis. Thus, the second objective of this dissertation is to relax the conventional merger simulation assumption of uniform pricing by retailers, allowing us to explore the impacts of zone pricing on post-merger price effects. Using the ready-to-eat cereals industry as a backdrop, it is shown that ignoring retail price discrimination veils a potentially diverse set of price effects that are otherwise lost in uniform pricing analyses. The goal of the final essay is to explore the implementation of more realistic supply channel interactions in merger simulations. In particular, a two-stage pricing game is used to conduct merger simulations in the refrigerated orange juice category. The overriding finding is that comparisons with conventionally used models will not be practical until the relationship between demand specification and two-stage game modeling is better understood.