New Tools for Competitive Effects: Do We Really Know What Works Best?

Mar 15, 2011

Competition agencies around the world are charged with the task of identifying and challenging mergers and acquisitions that are likely to substantially lessen competition. Agencies have over the years relied upon a wide range of information and economic theories to investigate the likely competitive effects of proposed transactions. Furthermore, the types of information and the economic models and tools employed by agency staff have evolved over time, largely in response to developments in economic theory and legal thinking. Developments in oligopoly theory on the one hand, and econometric methods for analyzing price and quantity data on the other, have shaped the theories of harm articulated by the agencies and the empirical tools used to investigate those theories. Many of these developments are reflected in merger guidelines issued by competition agencies in order to assist merging parties and antitrust practitioners generally.

Over the last few years, there has been a lively debate among antitrust practitioners and the academic community about the appropriate tools for analyzing unilateral effects in a merger investigation. The debate was fueled in part by the 2008 publication of a working paper by Joseph Farrell and Carl Shapiro that proposed a new method for analyzing the competitive effects of mergers in differentiated products industries. Acknowledging the enormous challenges faced by competition agencies, Farrell & Shapiro proposed a measure

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