Pass-Through and the Prediction of Merger Price Effects

We use Monte Carlo experiments to study how pass-through can improve merger price predictions, focusing on the first order approximation (FOA) proposed in Jaffe and Weyl []. FOA addresses the functional form misspecification that can exist in standard merger simulations. We find that the predictions of FOA are tightly distributed around the true price effects if pass-through is precise, but that measurement error in pass-through diminishes accuracy. As a comparison to FOA, we also study a methodology that uses pass-through to select among functional forms for use in simulation. This alternative also increases accuracy relative to standard merger simulation and proves more robust to measurement error.