Estimation of the Impact of Mergers in the Banking Industry with Historical Data on Mergers

The standard merger simulation methods, which measure the e¤ect of the change in ownership on unilateral pricing incentives, solely focus on price but do not generally provide an accurate forecast on price (Peters, 2006; Weinberg and Hosken, 2008). The prediction errors on price can come from the postmerger change in product quality, entry, change in supply, shifts in demand, or model misspeci\u85cation. With historical data on mergers, this paper develops a methodology of merger simulation that extends merger prediction from price to product quality and entry, and improves postmerger prediction on price by incorporating merger synergies (change in supply), postmerger change in product quality and entry. The historical data on mergers reveal the degree of merger synergies in a given industry, allow us to estimate the pattern of postmerger change in product quality, and help us select reasonable assumptions in merger simulation. I apply the methodology to analyze seven within-market bank mergers in the U.S., and compare the prediction with postmerger observations