Estimation of cost efficiencies from mergers: application to US radio

Abstract

This article estimates fixed-cost efficiencies from mergers using a dynamic oligopoly model in which mergers and repositioning of products are endogenous. The inference is based on revealed preference approach selecting cost synergies that rationalize observed merger decisions. The estimates can be used to assess the total welfare impact of retrospective and counterfactual mergers. The framework is applied to estimate cost efficiencies after the 1996 deregulation of U.S. radio industry. Within the period of 1996 to 2006 the cost savings resulting from mergers amount to $1.2 billion per year (equally split across economies of scale and within-format cost synergies). as well as participants at numerous seminars.1 In this article, I use the terms merger and acquisition interchangeably to mean any change of ownership of a part of or a whole company. 816Copyright C 2014, RAND. JEZIORSKI / 817 one I infer that the presumed cost efficiencies are too large. On the other hand, when the model predicts no merger, but the data indicate one, I infer the presumed cost efficiencies are too small.Implementing the proposed cost estimator requires robust long-run predictions of gains from mergers, which are obtained using a dynamic model with endogenous mergers and product characteristics. In contrast, previous empirical work analyzes mergers in a static framework and treats market structure as given (see Nevo, 2000;Pinkse and Slade, 2004;Ivaldi and Verboven, 2005). Such static models are useful in addressing the short-run impacts of mergers but do not account for resulting long-run changes in the market structure. Benkard, Bodoh-Creed, and Lazarev (2008) evaluate a longer-run effect of a merger on market structure but still treat it as an exogenous one-time event. The proposed dynamic framework builds on the above methods accounting for dynamic processes such as self-selection of mergers, follow-up mergers leading to merger waves, and postmerger product repositioning.Modelling and estimating models with endogenous mergers pose econometric and computational challenges. To evaluate a potential merger, both acquirer and acquiree must take into account the ownership structure and characteristics of all active products. Because the number of such variables is usually large, one has to deal with the curse of dimensionality, which increases data requirements and poses computational challenges. In this article, I overcome these issues by using a data set on thousands of mergers within one industry, and by applying recent advancements in the estimation of dynamic games (see Bajari, Benkard, and Levin, 2007; hereafter "BBL"). Moreover, modelling of mergers in a dynamic framework introduces several conceptual issues including simultaneous merger bids for a single product and multiproduct bids by a single acquirer. This study addresses the former issue by modelling players' moves as sequential with bigger owners moving first, and the latter issue by approximating multiproduct mergers with a series of highly correlated product-by-product acq...

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