Review of Industrial Organization 18: 53–75, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
Price-Performance Competition and the Merger
RAYMOND S. HARTMAN
LEXECON Inc., 4 Cambridge Center, Cambridge, MA 02142, U.S.A.
Abstract. While analysis of competition among differentiated products has evolved under the re-
visions to the Merger Guidelines since 1982, it remains ad hoc. This paper argues that price and
performance competition among differentiated products is the rule rather than the exception and
proposes methods to explicitly analyze both forms of competition. The methods address price and
performance competition in demand and supply, explicitly incorporating competitive responses as
called for by the 1992 Guidelines. Empirical implementation is discussed for a speciﬁc market.
Key words: Merger guidelines, performance competition, price competition.
I. Introduction and Overview
Since their inception, the Merger Guidelines have continued to evolve. Two areas in
which evolution has been demonstrable are the treatment of differentiated products
and the degree to which competitive analysis is allowed to rebut structural ﬁndings
While the expressed concern of the Merger Guidelines hasalwaysbeentheex-
ploitation of market power through price and “variables other than price” that
result in “transfers of wealth from buyers to sellers and ...misallocation of re-
sources” (1984 Guidelines, §1.0), the Guidelines have in practice focused primarily
upon product prices using notions of homogeneous product competition. Explicit
analysis of product differentiation and performance competition has been resisted
(1984 Guidelines, § 3.411). A consequence has been idiosyncratic decisions re-
garding market size and concentration. For example, in scrutinizing recent bank
mergers, the Department of Justice and the Federal Reserve Board have attemp-
ted to identify the size of the relevant product markets by including differentiated
products in the market but discounting the extent of their substitutability. In some
markets, deposits of savings and loan institutions have been given a weight of 50%
The author gratefully acknowledges the comments of Jerry Hausman, Gregory Leonard and two