DP9027 Does Merger Simulation Work? A "Natural Experiment" in the Swedish Analgesics Market Market

Author(s): Jonas Björnerstedt, Frank Verboven
Publication Date: July 2012
Keyword(s): analgesics, constant expenditures nested logit, ex post merger analysis, merger simulation
JEL(s): L40, L41
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9027

We exploit a natural experiment associated with a large merger in the Swedish market for analgesics (painkillers). We confront the predictions from a merger simulation study, as conducted during the investigation, with the actual merger effects over a two-year comparison window. The merger simulation model is based on a constant expenditures specification for the nested logit model (as an alternative to the typical unit demand specification). The model predicts a large price increase of 34% by the merging firms, because there is strong market segmentation and the merging firms are the only competitors in the largest segment. The actual price increase after the merger is of a similar order of magnitude: +42% in absolute terms and +35% relative to the