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American Economic Journal: Microeconomics: Vol. 5 No. 4 (November 2013)

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The First-Order Approach to Merger Analysis

Article Citation

Jaffe, Sonia, and E. Glen Weyl. 2013. "The First-Order Approach to Merger Analysis." American Economic Journal: Microeconomics, 5(4): 188-218.

DOI: 10.1257/mic.5.4.188

Abstract

Using information local to the premerger equilibrium, we derive approximations of the expected changes in prices and welfare generated by a merger. We extend the pricing pressure approach of recent work to allow for non-Bertrand conduct, adjusting the diversion ratio and incorporating the change in anticipated accommodation. To convert pricing pressures into quantitative estimates of price changes, we multiply them by the merger pass-through matrix, which (under conditions we specify) is approximated by the premerger rate at which cost increases are passed through to prices. Weighting the price changes by quantities gives the change in consumer surplus.

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Authors

Jaffe, Sonia (Harvard U and Becker Friedman Institute, U Chicago)
Weyl, E. Glen (U Chicago)

JEL Classifications

D43: Market Structure and Pricing: Oligopoly and Other Forms of Market Imperfection
G34: Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
L11: Production, Pricing, and Market Structure; Size Distribution of Firms
L13: Oligopoly and Other Imperfect Markets

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