Improving Merger Analysis With Randomized Controls Trials

19 July 2016
By Dr. Elizabeth M. Bailey

In an article published in Law360, NERA Affiliated Academic Dr. Elizabeth M. Bailey proposes advancing the use of randomized controlled trials, or RCTs, to assess causal relationships in merger analyses. Antitrust lawyers, economists and regulators often rely on natural experiments to predict whether a merger will cause prices to rise. Natural experiments look at historical precedent—events that occurred in the marketplace in the past—as informative cues regarding customer substitution patterns and diversion ratios. However, natural experiments may not fit the gold standard of a controlled experiment. Dr. Bailey proposes RCTs to parse cause and effect in price change and customer behavior. In particular, Dr. Bailey examines A/B tests which can be used to assess how frequently customers of the acquiring firm switch to the product or service sold by the target firm in response to a relative change in price. RCT techniques are increasing in ordinary course business practice and Dr. Bailey discusses how they can be expanded to address questions that arise in merger analysis.