Simulating The Unilateral Effects Of A Proposed Horizontal Merger In Differentiated Products Industries

Since Werden and Hausman et al. (1994) first predicted the effects of a proposed horizontal merger in differentiated products industries by using so-called merger simulation, the approaches to simulate the unilateral effects of a merger have been developed dramatically and accepted by antitrust authorities in the US and the EU. For assessing a proposed merger in differentiated products market, the simulation merger is better than the traditional structural analysis approach. Logit demand system and PCAIDS demand system are the most commonly used models of horizontal merger simulation analysis in Bertrand differentiated products market. Compared to structural analysis approach ,these merger simulations have the particular virtues of low informational and computational burdens. This paper first discusses merger simulation using logit demand. In this way, the logit model can be used to predict the price and welfare effects of mergers. This paper, through a hypothetical merger in server industry in China, examines how to assessing the unilateral effects of a horizontal merger in differentiated products industries by using merger simulation. When the market structure does not satisfy Independence of Irrelevant Alternatives, merger simulation based on nested logit demand has been discussed further with the same example. When relaxing the assumption of marginal cost constant, I find that efficiencies have a significant impact on the results of merger simulation. But even taking into account the situation of nested or efficiencies, a number of mergers will lead to reduced welfare. According to the data of Saha and Simon (2000) , I illustrate an analysis of divestiture using the logit demand-based merger simulation. PCAIDS can be implemented using market shares and two price elasticities. Through a hypothetical merger in digital camera industry in China, I probe into the PCAIDS demand-based merger simulation. Meanwhile, this paper also shows how PCAIDS can be applied to the analysis of nest, efficiencies, divestiture, and entry. Finally, I utilize Matlab software to program all examples.