On the Risk of Using a Firm-Level Approach to Identify Relevant Markets

Timo Autio, Jorge Padilla, Salvatore Piccolo (), Pekka Sääskilahti and Lotta Väänänen
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Timo Autio: Compass Lexecon
Jorge Padilla: Compass Lexecon
Lotta Väänänen: Compass Lexecon

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: In a recent influential paper Coate et al. (2020) have criticized the standard firm-level approach to market definition in merger review. They argue why a market-level approach to critical loss is more appropriate than a firm-level critical loss analysis. Their conclusion is that under certain plausible demand scenarios - i.e., non-linearity of demand functions - a diversion-based firm-level analysis could easily reach the wrong answer on market definition. We extend their analysis by showing that in standard environments used by the most recent theoretical and empirical academic work on merger analysis (namely CES and logit demand functions), a firm level approach actually leads to an excessively narrow market definition as opposed to a market-level approach, thereby increasing the risk of type I errors.

Keywords: Critical Loss Analysis; Firm- and Market-level approach; Mergers; Non-linear Demand. (search for similar items in EconPapers)
JEL-codes: D43 G34 L13 L4 (search for similar items in EconPapers)
Date: 2020-09-26
New Economics Papers: this item is included in nep-cfn, nep-com, nep-ind and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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