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Filistrucchi, Klein and Michielsen: Merger simulation in a two-sided market Comment by Lars Sørgard, Norwegian School of Economics Media economics conference, Moscow, 28-29.10.11 28.10.2011 Merger simulation 1 The paper • BLP approach to the dutch newspaper market • Estimation of demand • Applies the estimated demand system to – Perform a SSNIP test – Perform a full merger simulation • Key point is to capture the two-sidedness of the market • Want to show that ignoring two-sidedness matters – Disclaimer: I have not seen the BLP model or estimation 28.10.2011 Merger simulation 2 Capturing two-sidedness • In theory two mechanisms: – More advertisements will lead to more (or less) demand from readers – More readers will lead to more demand from advertisers • But the first effect is ruled out, because no empirical finding of such an effect • Then two-sidedness is rather limited in this market – Good example of a what might happen in a two-sided market? – Can one use the empirical result to argue that the effect shall be ignored in the theoretical model? 28.10.2011 Merger simulation 3 SSNIP test • Profitable for a hypothetical monopolist to increase any or all prices with 5 %? • In the paper one particular approach: – Incresing subscription prices with 5 % given that advertising prices are optimally set • But why is this the only possible SSNIP? – Could instead increase advertising prices for optimal subscription prices – Could increase only one of the prices, not the other one • Why π = 0 when higher prices and no change in readership (see Table 4)? 28.10.2011 Merger simulation 4 UPP rather than SSNIP? • Have argued that lower mc may lead to no change in prices • Why not relate that to the UPP test? – Upward Pricing Pressure – UPP closer to a competitive assessment than SSNIP (see Farrell/Shapiro) • Could apply the empirical model on UPP – On which side of the market largest UPP? – Avoid some of the problems with both SSNIP and merger simulation (see next point) 28.10.2011 Merger simulation 5 Merger simulation - challenges • Why larger increase in subscription prices with than without network effects (Table 5)? • Results are very sensitive to some crucial parameters that are hard to estimate? – Demand curvate – List prices on ads – a good measure of net prices? • Merging firm’s choice is limited – Repositioning not allowed – But isn’t that quite unrealistic? • Could spread out after the merger • Or close down one branch after the merger 28.10.2011 Merger simulation 6