Churn Versus Diversion in Antitrust: An Illustrative Model

Yongmin Chen, Marius Schwartz
2016 Economica  
An important question in merger analysis is how much of a ...rm's lost output after a unilateral price increase will shift to the merger partner. To estimate this diversion ratio, antitrust agencies sometimes use data on consumer switching ("churn"), potentially caused by various reasons. This paper uses a tractable model of oligopoly competition to investigate the relation between churn and diversion, depending on what caused the churn. If the cause is an exogenous decrease in a ...rm's
more » ... quality and all prices remain constant, or an increase in its marginal cost that induces a price increase only by that ...rm, then churn ratios will equal the corresponding diversion ratios; for the same quality or cost shocks, if churn is observed after all prices adjust to the new equilibrium, churn ratios will generally di¤er from diversion ratios, but nevertheless will still track the ranking of diversion ratios across the ...rm's competitors. If the exogenous shock is an increase in a rival's product quality, or a decrease in its cost that leads to a price decrease, the churn ratio to that rival will always overstate the diversion ratio. We also consider churn caused by shifts in consumer preferences, broadly interpreted to include changed circumstances or learning about product attributes. Plausibly, churn ratios can then suggest a wrong ranking of how intensely the ...rm competes with various rivals. Glen Weyl, and conference and seminar participants at UIBE Beijing, Bates White, and the Israel Antitrust Authority. We have served as consultants for a company in the communications sector, but the article re ‡ects our views alone and contains no proprietary information.
doi:10.1111/ecca.12207 fatcat:46pg3alezbgcxnt67g6vua7z34