The Oil Industry Controversy: It's Not the Assumptions You Make, But What You Make of Them
6 April 2005
By Dr. Elizabeth M. Bailey
Recent mergers in the petroleum industry have generated a high-spirited debate, involving congressional hearings and independent assessments, over the estimated effect of those mergers on gasoline prices at the pump. The debate surrounding the econometric analyses is, at its core, a familiar economic debate over assumptions and robustness of results.
In this article, NERA Vice President Dr. Elizabeth M. Bailey examines the differences in the estimation strategies that underlie the econometric studies conducted by the General Accounting Office and the Federal Trade Commission's Bureau of Economics which assess the effect of mergers in the petroleum industry on US gasoline prices. Dr. Bailey explains how these same issues involving the role of assumptions and the robustness of results can arise in any econometric analysis of the competitive effects of a proposed merger regardless of industry. Dr. Bailey also discusses how best to address these issues in discussions with the antitrust agencies during the merger review process. She concludes that the key to overcoming questions and criticisms is to test the validity of the assumptions upon which the econometric model is constructed and, if it's not possible to test certain assumptions, demonstrate that the results are not sensitive to those assumptions.
This article from the Spring 2005 issue of The Threshold, Volume V, Number 2, has been reprinted with permission from the publisher, the Mergers and Acquisitions Committee of the American Bar Association Section of Antitrust Law. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means, or downloaded or stored in an electronic database or retrieval system, without the express written consent of the American Bar Association.
