Merger Screens: Market-Share Based Approaches and 'Upward Pricing Pressure'

The Antitrust Source, February 2010

10 Pages Posted: 10 Mar 2010

See all articles by Elizabeth M. Bailey

Elizabeth M. Bailey

University of California, Berkeley - Haas School of Business

Gregory K. Leonard

Edgeworth Economics

G. Steven Olley

affiliation not provided to SSRN

Lawrence Wu

National Economic Research Associates (NERA)

Date Written: 2010

Abstract

The US Department of Justice and Federal Trade Commission receive notification regarding thousands of mergers per year, and must identify, from the entire set of mergers, those that require further investigation. Merger screens are critical to efficient and effective merger enforcement policy, but traditional market share-based screens are often ineffective. An alternative approach is based on the concept of "upward pricing pressure," or UPP, which is a measure of the strength of the merged firm's incentive to increase price above pre-merger levels. In this article, we examine whether UPP would provide a useful screening device that the Agencies could use during the initial waiting period to decide whether a Second Request should be issued. We begin our analysis by providing an alternative derivation of UPP and show that UPP flows from the familiar logic of unilateral effects. We then discuss why reliable estimates of the three key inputs to UPP -- diversion ratios, gross profit margins, and efficiencies -- are unlikely to be available during the initial waiting period, thereby limiting the extent to which UPP can be a useful screen in the first thirty days.

Keywords: Antitrust, Merger Analysis

JEL Classification: L4

Suggested Citation

Bailey, Elizabeth M. and Leonard, Gregory K. and Olley, G. Steven and Wu, Lawrence Y., Merger Screens: Market-Share Based Approaches and 'Upward Pricing Pressure' (2010). The Antitrust Source, February 2010. Available at SSRN: https://ssrn.com/abstract=1567539

Elizabeth M. Bailey

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Gregory K. Leonard (Contact Author)

Edgeworth Economics ( email )

333 Bush St.
Suite 1450
San Francisco, CA 94104
United States

G. Steven Olley

affiliation not provided to SSRN ( email )

Lawrence Y. Wu

National Economic Research Associates (NERA) ( email )

Four Embarcadero Center
Suite 400
San Francisco, CA 94111
United States
415-291-1007 (Phone)

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