The Upward Pricing Pressure Test for Merger Analysis: An Empirical Examination
AbstractThe 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 de nition, the UPP's appeal lies in its ease of use: one simple formula indicates whether a merging rm has an incentive to increase prices postmerger. This paper rst 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 simpli cation, 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 nd 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Auckland University of Technology, Department of Economics in its series Working Papers with number 2013-03.
Length: 39 pages
Date of creation: Feb 2013
Date of revision:
Contact details of provider:
Postal: Commerce House, 360 Queen Street, Private Bag 92006, Auckland 1020
Phone: +64 9 917-9721
Fax: +64 9 917-9976
Web page: http://www.aut.ac.nz/business/working-paper-series
More information through EDIRC
merger; upward pricing pressure;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-06 (All new papers)
- NEP-COM-2013-09-06 (Industrial Competition)
- NEP-IND-2013-09-06 (Industrial Organization)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
- 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.
- Farrell, Joseph & Shapiro, Carl, 1988.
"Horizontal Mergers: An Equilibrium Analysis,"
Department of Economics, Working Paper Series
qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Steven Berry & Panle Jia, 2010.
"Tracing the Woes: An Empirical Analysis of the Airline Industry,"
American Economic Journal: Microeconomics,
American Economic Association, vol. 2(3), pages 1-43, August.
- Steven Berry & Panle Jia, 2008. "Tracing the Woes: An Empirical Analysis of the Airline Industry," NBER Working Papers 14503, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gail Pacheco).
If references are entirely missing, you can add them using this form.