The Enhanced Upward Pressure on Price Screen: Merging Markets into the UPP Methodology

Abstract

Farrell and Shapiro’s Upward Pressure on Price (UPP) structure is advanced as a technique to screen mergers in differentiated product markets. Lacking an ability to link their analysis with experiences from relevant markets, Farrell and Shapiro propose to assume substantial efficiencies, and conclude that any positive upward pressure on price is sufficient to trigger potential concerns. This structure creates problems: the refusal to tolerate any positive UPP leads the screen to find concerns with a broad collection of mergers and an assumption of high efficiencies means the screen is unable to identify concerns for certain mergers in low price-cost margin businesses. If minor changes are made in the UPP formula and the UPP effect is adjusted for market share, it is possible to define revised UPP-based models. One of the models can be shown to be compatible with historical FTC experience, given an assumed toleration of 2-3 percent upward pressure on price. Further research could improve the parameterization of an UPP-related screen and generate an even more reliable index. In some form, UPP analysis may succeed at defining the structural index for certain unilateral effects mergers.

Keywords: mergers, unilateral effects, simulation UPP

JEL Classification: K21, L40