2002.Swedish.Comp.Auth

2002.Swedish.Comp.Auth - Calibrated Economic Models Add...

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Werden is Senior Economic Counsel, Antitrust Division, U.S. Department of Justice; * [email protected] The views expressed herein are not purported to reflect those of the U.S. Department of Justice. Froeb is William C. and Margaret M. Oehmig Associate Professor of Entrepreneurship and Free Enterprise, Owen Graduate School of Management, Vanderbilt University; [email protected] For a survey of uses of econometrics in antitrust litigation, see Jonathan B. Baker & Daniel 1 L. Rubinfeld, Empirical Methods in Antitrust Litigation: Review and Critique , 1 A M . L. & E CON . R EV . 386 (1999). June 24, 2002 Calibrated Economic Models Add Focus, Accuracy, and Persuasiveness to Merger Analysis Gregory J. Werden Luke M. Froeb * The traditional competitive analysis of mergers was developed mainly by judges in the United States, with training in neither economics nor antitrust, who had to decide whether particular mergers substantially lessened competition. Economists participated in that process mainly as expert witnesses, typically offering little more than ultimate conclusions. Economic models (for example, models of oligopoly) and empirical studies (for example, of the relationship between market concentration and price) were at most a basis for crude intuition about the effects of increased market concentration. Traditional merger analysis has been giving way to a more scientific inquiry that applies the full panoply of tools provided by modern economics. The competitive analysis of mergers increasingly employs formal microeconomic models and econometrics—statistical analysis designed for, and applied to, economic data. Of 1 particular significance in merger cases is the use of “calibrated economic models,” i.e., quantitative analysis using formal economic models in which the values of the key parameters are based on the observable facts of the merger under review. The calibration of models to the facts of the case may be based on econometric studies or direct measurements of relevant quantities. And calibrated economic models may be used to inform the traditional structural analysis of mergers, based on market delineation and market shares, or used instead of structural analysis.
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± This third advantage may be more important in the United States than in some other places. 2 In the United States, only the courts have the power to enjoin the consummation of a merger. In the European Union, and some countries, competition authorities can prevent consummation of a merger, although their decisions can be overruled by courts. See Gregory J. Werden, The 1982 Merger Guidelines and the Ascent of the Hypothetical 3 Monopolist Paradigm, available at http://www.usdoj.gov/atr/hmerger/11256.htm. For details of the application of the paradigm, see Gregory J. Werden, Demand Elasticities in Antitrust Analysis , 66 A NTITRUST L.J. 363, 387–96 (1998); Gregory J. Werden, Market Delineation under the Merger Guidelines: A Tenth Anniversary Retrospective , 38 A NTITRUST B ULL . 517 (1993); Gregory J. Werden,
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