Upward Pressure on Price (UPP) Analysis: Issues and Implications For Merger Policy

Abstract:     
Farrell and Shapiro’s Upward Pressure on Price (UPP) framework is an innovative and elegant technique designed to evaluate mergers in differentiated product markets. The authors advance their approach primarily as a screen for unilateral effects cases, although others suggest that UPP might be implemented to create a presumption of anticompetitive effect. Whether used as a screen or to establish a presumption, the fundamental workings are the same and the same two issues are present. First, there is no empirical evidence confirming that the method can reliably predict whether a merger is likely to increase price and second, UPP analysis screens or presumes as anticompetitive a very large universe of mergers. We develop simple simulations illustrating that a UPP- based approach would identify mergers as potentially problematic at levels that have not attracted serious scrutiny from any major antitrust authority in decades. Farrell and Shapiro’s UPP methodology also has potential as an alternative to merger simulation. Here, we are cautiously optimistic that UPP analysis can replace the complex simulation models introduced by economists over the last 20 years. While the UPP analysis does sacrifice some detail, it offers greater transparency, and thus everyone (economists, lawyers, judges, and even business executives) can easily understand the effects of the parameters on the predictions of the model. However, we advocate caution because UPP simulation analysis, although holding numerous advantages over traditional simulation, has not been shown to reliably predict the price effects of mergers and should not be used in any particular case without such evidence.

Number of Pages in PDF File: 30

Keywords: mergers, unilateral effects, merger simulation, UPP

JEL Classification: K21, l40

working papers series