Predicting potential welfare effects of actual and hypothetical merger proposals in the Turkish privatization program

Abstract

Antitrust economists routinely use simulation models to predict the price effect of a transaction or agreement that involves collective pricing and/or collective profit maximization, such as a merger. Proportionality-Calibrated Almost Ideal Demand System (PCAIDS) model is a variant of the Almost Ideal Demand System (AIDS) model used to locally approximate a demand system for a differentiated-product market where the competitors are engaged in Bertrand conduct. PCAIDS model exploits the independence of irrelevant alternatives (IIA) assumption to simulate firms’ (collective or unilateral) pricing conduct even where only a few pieces of market-level and firm-level information are available. We apply this model to actual and hypothetical proposed merger cases in Turkey, both as a market test and to predict the unilateral price increase effect of each transaction. We also calculate the minimum level of marginal cost savings that the merging firms would need, in order to maintain post-merger prices at pre-merger levels.