+ Focus on the pharmaceutical industry

Lecture 

1. What is the main motivation for horizontal mergers?
   • Merger paradox (Table 15.1. from Pepall et al. (2014))
   • Merger in a differentiated Bertrand model
2. Merger policy
   • Unilateral effects
     • Simple approach by Shapiro (1995)
       1. Calculate the diversion ratio between merging firms (D =  fraction of the sales lost by Brand A due to this price increase would be captured by Brand B.)
       2. Calculate the post-merger price based on the model that suits the situation best. E.g. for constant elasticity demand and symmetric firms with one product, the percentage increase in price is mD/(1–m–D), where m is the profit margin.
       3. Compare the price increase against potential cost synergies.
     • Structural approach (Ivaldi and Verboven, 2005)
   • Coordinated effects
   • Merger remedies
     •  Structural remedies modify the allocation of property rights.
     •  Behavioral remedies set constraints on merged firms’ behavior.
       

You can also refer to the textbook of Pepall et al. (2014), pp. 388-390, 403-404.

Seminar

• Homework for all:  Carefully read the introduction of Björnerstedt and Verboven (2016). You should be able to answer questions about the main story of the paper (from your memory).
• Projects:
  • Task 1:   Present the market for OTC painkillers, the merger, and its effects, and present (the intuition behind) the empirical framework  (Sections I and II of Björnerstedt and Verboven, 2016). When useful, show how the empirical framework is implemented in the Matlab code. 
    Presentation by Julie and Michal
  • Task 2:   Present the results of the merger simulation and evaluate the merger simulation (Sections III and IV of  Björnerstedt and Verboven, 2016). When useful, show how the estimation works in the Matlab code.