katie curry
TRANSCRIPT
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Data Analysis for
Competition Policy: an
Introduction toEconometrics
Katie Curry
Senior Economist, OFT
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Outline What is econometrics?
Why is it useful?
Example
- Defining the relevant market in a recent merger case
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What is econometrics? Statistical modelling of economic
relationships
- e.g. how consumers respond to price changes A commonly used technique is called
regression analysis
Regression analysis uses actual data toassess how one variable of interest (e.g.
quantity consumed) is related to possible
explanatory factors (e.g. price)
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What is econometrics? ctd. Allows for the fact we dont have data on all
possible influences by including an error term
Use data to estimate equation of the form:
Y = a + bX + e
Variable tryingto explain.Average value
of Y.X is the explanatory
factor. b measures
the average increase
in Y caused by an
increase in X.
Error term.
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What is econometrics? ctd.
Y
X
a b
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Why use econometrics? It allows us to analyse a large amount of information
in a systematic way
- Suppose we have data on the price of ice cream and the quantityof ice cream eaten and we are interested in how consumerdemand responds to changes in price
- We could look at what happened to ice cream sales every timethe price changed
- But if there are lots of observations this could take a long time-and if we only look at one or two instances our conclusions could
be unrepresentative
- Regression analysis can handle millions of observations easily
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Why use econometrics? ctd. Can give more meaningful results than simple
statistics
- We could look at the average price of ice cream andthe average quantity eaten in a large dataset veryeasily
-Knowing that a 5% price increase leads to a 1%
reduction in demand could be much more helpful than
simply knowing the average level of each
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Why use econometrics? ctd. Controls for effect of more than one variable
- We could use our data to make a chart, showing howquantity is related to price
- However there may be many other factors affectingquantity demanded that obscure this relationship (e.g.
more ice cream in the summer)
- Econometrics can control for these other factors,allowing us to focus on the relationship we are
interested in
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Example of econometrics in practice
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Example of econometrics in practice Used to define relevant market in a merger
Merging parties overlapped in manufactureand supply of specific types of soft cheese
(Brie, Camembert and goats cheese)
Parties submitted that British cheese was in a
separate market from French cheese so therewas no overlap
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Econometrics results used for market
definition Used an econometric model to estimate how demand
for one cheese changes when its own price and theprice of a potential substitute changes
The elasticity estimates obtained in this way wereused to conduct a critical loss analysis
Critical loss analysis uses data on profit margins andelasticities to calculate whether a 5% price increase
would be profitable
Starts with narrowest market- if not profitable, thenmove to broader market
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Almost Ideal Demand System Useful way of estimating demand when there
are many brands that can be grouped together
in segments Assumes customers decide how much to
spend on one segment (e.g. camembert) andthen decide which brand to buy
Demand for each brand can be estimated as afunction of the prices of all of the brands inthe same segment
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The ideal model
SOFT CHEESE
CamembertOther soft
cheeses
Somerset
French
branded
Brie
Goats cheese
Mozzarella
Etc.French
private
label
Somerset
French
brandedFrench
private
label
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What we actually did
SOFT CHEESE
CamembertBrie
(All types)
Somerset
French
brandedFrench
private
label
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Illustrative results
% change indemand for:
Following a 1% change in the price of:
SomersetCamembert
Frenchprivate-labelCamembert
Frenchbranded
CamembertBrie
SomersetCamembert
French private-labelCamembert
French brandedCamembert
Brie
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Questions?