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Critical Efficiencies as Upward Pricing Pressure with Feedback Effects

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  • Neurohr Bertram

    (Oxera, John F. Kennedy Haus, Rahel-Hirsch-Straße 10, 10557, Berlin, Germany)

Abstract

Farrell and Shapiro’s upward pricing pressure (‘UPP’) is widely used in merger analysis due to its intuitiveness, despite not accounting for the interdependence between the merging firms’ pricing incentives (‘feedback effects’). However, ignoring feedback effects can have an impact on the way competition authorities rank mergers. The main result of this article is that UPP with feedback effects is equivalent to Werden’s critical efficiencies. Importantly, this link allows for the derivation of an expression that combines the intuition of UPP as the ‘value of diverted sales’ with the accuracy of critical efficiencies. Throughout, the focus is on the static unilateral effects of horizontal mergers with differentiated Bertrand competition.

Suggested Citation

  • Neurohr Bertram, 2019. "Critical Efficiencies as Upward Pricing Pressure with Feedback Effects," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(1), pages 1-7, January.
    • Handle: RePEc:bpj:bejtec:v:19:y:2019:i:1:p:7:n:12
    DOI: 10.1515/bejte-2017-0049
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    References listed on IDEAS

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    1. Farrell Joseph & Shapiro Carl, 2010. "Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-41, March.
    2. 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 409-413, December.
    3. Richard Schmalensee, 2009. "Should New Merger Guidelines Give UPP Market Definition?," Antitrust Chronicle, Competition Policy International, vol. 12.
    4. Sonia Jaffe & E. Glen Weyl, 2013. "The First-Order Approach to Merger Analysis," American Economic Journal: Microeconomics, American Economic Association, vol. 5(4), pages 188-218, November.
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