Merger simulation continues to attract a great deal of attention. It is a technique that is frequently applied by economists at the Antitrust Division and the Federal Trade Commission (FTC) to evaluate mergers that raise concerns about unilateral competitive effects, and it was a topic of discussion at a 2001 FTC conference on empirical industrial organization. Simulation models are no substitute for a careful antitrust analysis, but they can help to identify the competitive issues and the areas where further inquiry is needed.

In this chapter from Economics of Antitrust: New Issues, Questions, and Insights, NERA Senior Vice President Dr. Lawrence Wu takes a deeper look at the inputs that are used to simulate the price effects of a proposed acquisition. He compares two methods of determining the elasticities of demand—econometric estimation and a proposed alternative called the Proportionality-Calibrated Almost Ideal Demand System (PCAIDS) approach—and finds that the two methods can yield different results. He concludes that econometric estimation is preferred when reliable data are available, and that the PCAIDS approach is valuable only if the results and underlying assumptions can be independently corroborated.