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The Upward Pricing Pressure Test and the Sensitivity of the Diversion Ratio

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  • Lydia Cheung

    (Department of Economics, Faculty of Business and Law, Auckland University of Technology)

Abstract

The diversion ratio is a key ingredient to the calculation of the Upward Pricing Pressure (UPP) test, which is a new shortcut for screening mergers. It measures the degree of substitutability between the merging goods, which affects the potential for price increase post-merger. There is currently little existing research on how the diversion ratio is to be estimated (unlike its cousin, the cross-price elasticity). This paper explores one of the methods to estimate diversion ratios, which is through the estimation of a demand system. Specifically, this paper shows that the estimated value of the diversion ratio is, in fact, little affected by one of the most contentious decisions in merger analysis: the definition of the market boundary.

Suggested Citation

  • Lydia Cheung, 2014. "The Upward Pricing Pressure Test and the Sensitivity of the Diversion Ratio," Working Papers 2014-08, Auckland University of Technology, Department of Economics.
    • Handle: RePEc:aut:wpaper:201408
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    References listed on IDEAS

    as
    1. Farrell Joseph & Shapiro Carl, 2010. "Upward Pricing Pressure in Horizontal Merger Analysis: Reply to Epstein and Rubinfeld," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-9, September.
    2. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-890, July.
    3. Christopher Conlon & Julie Holland Mortimer, 2021. "Empirical properties of diversion ratios," RAND Journal of Economics, RAND Corporation, vol. 52(4), pages 693-726, December.
    4. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
    5. Christopher T. Conlon & Julie Holland Mortimer, 2013. "An Experimental Approach to Merger Evaluation," NBER Working Papers 19703, National Bureau of Economic Research, Inc.
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