Why Can’t We All Just Get Along? Structural Modelling and Natural Experiments in Merger Analysis

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Series Details Volume 8, Number 1, Pages 41-71
Publication Date January 2012
ISSN 1744-1056
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"Economists tend to address problems with one of two general methodologies. Structuralists directly apply economic theory to build mathematical models and, once the models are parameterised, use those models to predict the effect of relevant policy changes. On the other hand, experimentalists indirectly apply economic theory to construct simple causal models that, when applied to data generated by a “natural experiment” associated with an exogenous change in a specific policy variable, offer some insight into the impact of the policy in question. Both methodologies face daunting challenges from real world problems, but, if properly implemented, offer reasonable approaches to aid in the understanding of economic phenomena."
"We start with a discussion of the fundamental principles of science to set the background for the analysis of decision-making. By definition, all scientific statements must be falsifiable. Given the potential for multiple theories to be scientific, policy decisions turn on the evidence underpinning the various scientific theories. Validation (testing) and verification (applicability) are the two key concerns, with theories expected to survive some attempt at falsification prior to application. Section C provides a background for both the structuralist and experimentalist methodologies. In general, structural approaches offer broader insights that may not be applicable to the relevant fact situation, while experimental methods offer clear, but often limited, insights into the relevant question. Testing sits at the heart of experimental analysis, but is often an
afterthought to the structuralist’s focus on modelling and parameterisation. Section D moves on to merger analysis, with analyses of both the Cournot and Bertrand merger models, along with an introduction to the natural experiment approach that serves to underpin the experimentalist analysis."
Source Link https://doi.org/10.5235/174410512800370106
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