Merger simulation is a commonly used technique when analyzing potential welfare costs and benefits of mergers between firms. Merger simulation models differ with respect to assumed form of competition that best describes the market (e.g. differentiated Bertrand competition, Cournot competition, auction models, etc.) as well as the structure of the chosen demand system (e.g. linear or log-linear demand, logit, almost ideal demand system (AIDS), etc.) Simulation Methods Cournot Oligopoly Farrell and Shapiro (1990) highlighted issues of the Department of Justice’s Merger Guidelines (1984), with its use of Herfindahl-Hirschman indices. The main issues they raised were the base assumptions that: Outputs remain unchanged in the merger process (both companies retained their initial outputs); There is a reliable and inverse relationship between market concentration) and market performance. They sought to instead to model mergers by Cournot oligopoly theory, establishing a series of propositions in both mergers effect on price and welfare. To establish their propositions a series of assumptions and conditions were made: Each firm’s reaction curves slope downwards, such that an increase in a rivals’ output lowers the firm’s marginal revenue. This assumption is made as if marginal revenues were unaffected by the others output, the equilibrium would not be a function of quantity. Which is necessary for application of Cournot theory. Each firm’s residual demand curve intersects above its marginal cost curve. This assumption is made as if marginal cost decreased with quantity, as it can in some cases with economies of scale, then there may be no Cournot equilibrium solution. These conditions favour accuracy of the modelling in markets with limited demand and products that do not have economies of scale. Based on the assumptions, they established 7 propositions relating to price and welfare outcomes of mergers. Price-based Propositions A merger raises its price if and only if the merged company markup is less than the sum of the pre-merger constituent markups, and the post-merger aggregate quantity is unchanged. If a merger generates no synergies, then in the long run it causes market price to rise. If a merger generates no synergies, then in the short run it will raise price if: Capital is immobile across facilities; All merging firms are equally efficient, and their long-run production has constant returns to scale. Welfare-based Propositions If sub-sect of colluding firms within a Cournot oligopolistic market change their behaviour, then their net effect on the other firms and customer is a