A Critical Analysis of Critical Loss Analysis

Market Definition and the Merger Guidelines

“…Here, as is now familiar, the way to predict the price elevation resulting from the merger is to determine the diversion ratio between the firms' products (suppose, for simplicity, that each sells only one) and use the levels of the premerger markups for each to determine how much price will rise. These ideas are long familiar from critical loss analysis-e.g., Baker and Bresnahan (1985), Harris and Simons (1989), O'Brien and Wickelgren (2003)-and have recently gained added attention due to Farrell and Shapiro's (2010) article. No market definition is involved.…”

Chapter 36 Antitrust Policy toward Horizontal Mergers

“…This is the essence of "critical loss analysis" [Harris and Simons (1989)]. For a critique of common uses of critical loss analysis, focusing on the importance of checking if those rough estimates of customer switching and margins are consistent with the firms' pre-merger behavior, see Katz and Shapiro (2003) and O'Brien and Wickelgren (2003). the price in market A so that p A = c + t. If t and c are independently distributed, then the correlation between the prices in the two markets is…”

Merger Simulations with Observed Diversion Ratios

“…2 O'Brien and Wickelgren (2003) reformulated the critical loss analysis for defining the relevant market to employ diversion ratios rather than price elasticities. See also Katz and Shapiro (2003).…”