A Net Present Value Approach to Merger Analysis

Abstract

The rise of unilateral effects analysis, as quantified by merger simulation, creates the potential to balance anticompetitive effects and efficiencies and improve the merger review process. Unfortunately, sophisticated economic models impose a tight structure on the analytical process, one that ignores the probability that the various effects will occur and focuses only on a rough estimate of the merger’s price effect. We propose to address this problem through the application of a simple risk adjusted Net Present Value model to offer a more comprehensive review of the effect of the merger on a price proxy for consumer welfare. We address the importance of accounting for the probabilities that the various effects will actually occur, the need to consider all the relevant efficiencies, the timing of the anticompetitive effects and efficiencies, as well as the potential out-of-market benefits from the merger. Because our balancing model is simple, robustness analysis is relatively straightforward, with the user able to change any of the key inputs and observe the likely effect on the policy prediction. Although we understand this quantitative methodology cannot be used in every case, it should be viable in any matter that is currently quantified, as well as a number of monopoly and collusion investigations in which the tools of unilateral effects analysis are not applicable.

Keywords: mergers, net present value, efficiencies, competition policy, balancing effects, merger simulation

JEL Classification: K21, K41, L40, M38