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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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    File URL: http://www.aut.ac.nz/__data/assets/pdf_file/0013/515200/Economics-WP-2014-08.pdf
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    References listed on IDEAS

    as
    1. Christopher T. Conlon & Julie Holland Mortimer, 2013. "Empirical Properties of Diversion Ratios," Boston College Working Papers in Economics 864, Boston College Department of Economics, revised 01 Jan 2019.
    2. 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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    Keywords

    Upward pricing pressure; mergers;

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