The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy

Gregory Werden and Luke Froeb

The Journal of Law, Economics, and Organization, 1994, vol. 10, issue 2, 407-26

Abstract: Using the logit model, and assuming Nash equilibrium in prices and constant marginal cost, it is straightforward to estimate critical demand parameters and simulate mergers. In this way, the logit model can be used to predict the price and welfare effects of mergers. We explore the effects of mergers in this model both analytically and through simulations of hypothetical mergers of U.S. long distance carriers. We find that only mergers involving AT&T would be likely to lessen welfare significantly. Simulations such as these provide a firmer foundation for antitrust policy than traditional structural indicators. The logit model is not always appropriate, but the basic methodology can be adapted to other demand systems. Copyright 1994 by Oxford University Press.

Date: 1994
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