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Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition

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  • Farrell Joseph

    ()
    (University of California, Berkeley)

  • Shapiro Carl

    ()
    (University of California, Berkeley)

Abstract

We describe a simple initial indicator of whether a proposed merger between rivals in a differentiated product industry is likely to raise prices through unilateral effects. Our diagnostic calibrates upward pricing pressure (UPP) resulting from the merger, based on the price/cost margins of the merging firms' products and the extent of direct substitution between them. As a screen for likely unilateral effects, this approach is practical, more transparent, and better grounded in economics than are concentration-based methods.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 10 (2010)
Issue (Month): 1 (March)
Pages: 1-41

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Handle: RePEc:bpj:bejtec:v:10:y:2010:i:1:n:9

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References

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  1. Edlin, Aaron S. & Farrell, Joseph, 2002. "The American Airlines Case: A Chance to Clarify Predation Policy," Department of Economics, Working Paper Series qt0wx7c4zf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Nocke, Volker & Whinston, Michael, 2008. "Dynamic Merger Review," CEPR Discussion Papers 7077, C.E.P.R. Discussion Papers.
  3. Werden, Gregory J, 1996. "A Robust Test for Consumer Welfare Enhancing Mergers among Sellers of Differentiated Products," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 409-13, December.
  4. Werden, G.J., 1992. "The History of Antitrust Market Delineation," Papers 92-8, U.S. Department of Justice - Antitrust Division.
  5. Marie Goppelsroeder & Maarten Pieter Schinkel & Jan Tuinstra, 2006. "Quantifying the Scope for Efficiency Defense in Merger Control: The Werden-Froeb-Index," Tinbergen Institute Discussion Papers 06-074/1, Tinbergen Institute.
  6. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March.
  7. Werden, G.J., 1996. "A Robust Test for Consumer Welfare Enhancing Mergers Among Sellers of Differentiated Products," Papers 96-01, U.S. Department of Justice - Antitrust Division.
  8. Federico Echenique, 2000. "Comparative Statics by Adaptive Dynamics and The Correspondence Principle," Econometric Society World Congress 2000 Contributed Papers 1906, Econometric Society.
  9. Dennis W. Carlton, 2007. "The Need to Measure the Effect of Merger Policy and How to Do It," EAG Discussions Papers 200715, Department of Justice, Antitrust Division.
  10. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  11. Oliver Budzinski & Isabel Ruhmer, 2008. "Merger Simulation in Competition Policy: A Survey," MAGKS Papers on Economics 200807, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  12. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009 Elsevier.
  13. Froeb, Luke & Tschantz, Steven & Werden, Gregory J., 2005. "Pass-through rates and the price effects of mergers," International Journal of Industrial Organization, Elsevier, vol. 23(9-10), pages 703-715, December.
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Citations

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Cited by:
  1. Richard Schmalensee, 2012. "“On a Level with Dentists?” Reflections on the Evolution of Industrial Organization," Review of Industrial Organization, Springer, vol. 41(3), pages 157-179, November.
  2. Pereira, Pedro & Ribeiro, Tiago & Vareda, João, 2013. "Delineating markets for bundles with consumer level data: The case of triple-play," International Journal of Industrial Organization, Elsevier, vol. 31(6), pages 760-773.
  3. E. Glen Weyl, 2010. "A Price Theory of Multi-sided Platforms," American Economic Review, American Economic Association, vol. 100(4), pages 1642-72, September.
  4. Oliver Budzinski & Björn A. Kuchinke, 2012. "Deal or No Deal? Consensual Arrangements as an Instrument of European Competition Policy," Review of Economics, Lucius & Lucius, vol. 63(3), pages 265-292.
  5. Lawrence J. White, 2013. "Monopoly and Dominant Firms: Antitrust Economics and Policy Approaches," Working Papers 13-13, New York University, Leonard N. Stern School of Business, Department of Economics.
  6. Louis Kaplow, 2011. "Market Definition and the Merger Guidelines," Review of Industrial Organization, Springer, vol. 39(1), pages 107-125, August.
  7. Evan Kwerel & Paul LaFontaine & Marius Schwartz, 2012. "Economics at the FCC, 2011–2012: Spectrum Incentive Auctions, Universal Service and Intercarrier Compensation Reform, and Mergers," Review of Industrial Organization, Springer, vol. 41(4), pages 271-302, December.
  8. Mathiesen, Lars & Nilsen, Øivind Anti & Sørgard, Lars, 2010. "Merger simulations with observed diversion ratios," Discussion Paper Series in Economics 27/2010, Department of Economics, Norwegian School of Economics.
  9. Wayne-Roy Gayle & Robert Marshall & Leslie Marx & Jean-François Richard, 2011. "Coordinated Effects in the 2010 Horizontal Merger Guidelines," Review of Industrial Organization, Springer, vol. 39(1), pages 39-56, August.
  10. Robert Willig, 2011. "Unilateral Competitive Effects of Mergers: Upward Pricing Pressure, Product Quality, and Other Extensions," Review of Industrial Organization, Springer, vol. 39(1), pages 19-38, August.
  11. Judd Stone & Joshua Wright, 2011. "The Sound of One Hand Clapping: The 2010 Merger Guidelines and the Challenge of Judicial Adoption," Review of Industrial Organization, Springer, vol. 39(1), pages 145-158, August.
  12. Herbert Hovenkamp, 2011. "Harm to Competition Under the 2010 Horizontal Merger Guidelines," Review of Industrial Organization, Springer, vol. 39(1), pages 3-18, August.
  13. Budzinski, Oliver, 2012. "Impact evaluation of merger control decisions," Ilmenau Economics Discussion Papers 75, Ilmenau University of Technology, Institute of Economics.
  14. Joseph Farrell & Paul Pautler & Michael Vita, 2009. "Economics at the FTC: Retrospective Merger Analysis with a Focus on Hospitals," Review of Industrial Organization, Springer, vol. 35(4), pages 369-385, December.
  15. E. Glen Weyl & Michal Fabinger, 2013. "Pass-Through as an Economic Tool: Principles of Incidence under Imperfect Competition," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 528 - 583.
  16. Niu, Shuai, 2013. "The equivalence of profit-sharing licensing and per-unit royalty licensing," Economic Modelling, Elsevier, vol. 32(C), pages 10-14.
  17. Daljord, Øystein & Sørgard, Lars, 2011. "Single-product versus uniform SSNIPs," International Review of Law and Economics, Elsevier, vol. 31(2), pages 142-146, June.

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