The Upward Pricing Pressure Test for Merger Analysis: An Empirical Examination
Posted by D. Daniel Sokol
Lydia Cheung (Department of Economics, Faculty of Business and Law, Auckland University of Technology) discusses The Upward Pricing Pressure Test for Merger Analysis: An Empirical Examination
ABSTRACT: The Upward Pricing Pressure (UPP) test developed by antitrust economists Joseph Farrell and Carl Shapiro marks a new era in antitrust and provides an alternative to the traditional concentration-based tests in merger analysis. In addition to being free of market definition, the UPP’s appeal lies in its ease of use: one simple formula indicates whether a merging firm has an incentive to increase prices postmerger. This paper first establishes the theoretical relationship between the UPP and the standard structural merger simulation, namely, that the UPP is a singleproduct merger simulation” that ignores the re-equilibration of all other endogenous variables except that product’s own price. To assess the consequence of this simplification, I compute “true” UPP values for a cross-section of airline markets using structurally estimated price elasticities, and confront them with the gold standard” of a merger simulation. I examine the predictive accuracy of both the sign and magnitude of the UPP. I find that it gives wrong sign predictions to an average 10% of the observations, and its value has an average correlation of 0:92 with the structurally simulated price changes. However, since this test is meant to bypass a complicated demand estimation, I then use the example of a simple logit demand to illustrate the consequence of using inaccurate demand-side inputs in the UPP: the test will give a wrong sign prediction over a much larger range of cost synergies. Lastly, I discuss the pass-through conditions for Farrell and Shapiro’s proposition, demonstrate empirically that they are not innocuous, and show that their violation can lead to false positive results (type I errors) in the UPP.
Featured News
Google and South Carolina Clash Over State Records Demand
May 8, 2024 by
CPI
Telefonica Germany Teams Up with Amazon Web Services to Migrate 5G Customers
May 8, 2024 by
CPI
Federal Judge Grants $7.4 Million Settlement in Pork Price-Fixing Case
May 8, 2024 by
CPI
Wilson Sonsini Bolsters Antitrust and Competition Practice with Key Partner Returns
May 8, 2024 by
CPI
EU to Scrutinize Telecom Italia’s Network Sale to KKR
May 8, 2024 by
CPI
Antitrust Mix by CPI
Antitrust Chronicle® – Economics of Criminal Antitrust
Apr 19, 2024 by
CPI
Navigating Economic Expert Work in Criminal Antitrust Litigation
Apr 19, 2024 by
CPI
The Increased Importance of Economics in Cartel Cases
Apr 19, 2024 by
CPI
A Law and Economics Analysis of the Antitrust Treatment of Physician Collective Price Agreements
Apr 19, 2024 by
CPI
Information Exchange In Criminal Antitrust Cases: How Economic Testimony Can Tip The Scales
Apr 19, 2024 by
CPI