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vGUPPI: Scoring Unilateral Pricing Incentives in Vertical Mergers

30 Pages Posted: 18 Jun 2012 Last revised: 28 Oct 2015

Serge Moresi

Charles River Associates (CRA)

Steven C. Salop

Georgetown University Law Center

Date Written: June 18, 2012

Abstract

One key concern in vertical merger cases is input foreclosure. Input foreclosure involves raising the costs of competitors in the downstream market, which could in turn increase the sales and profits of the downstream merger partner. In this article, we explain how the upward pricing pressure resulting from unilateral incentives following a vertical merger can be scored with vertical Gross Upward Pricing Pressure Indices (“vGUPPIs”). These vGUPPIs are derived from an economic model where upstream firms sell differentiated inputs to downstream firms which in turn sell differentiated products. There are separate vGUPPIs for the upstream and downstream merging firms and, in addition, vGUPPIs for the rivals of the downstream firm whose costs are raised. Our model also explains how the vGUPPIs can account for potential input substitution and merger-specific elimination of double marginalization. These vGUPPIs are analogous to the horizontal GUPPIs commonly used for the evaluation of unilateral effects in horizontal mergers. Like the horizontal GUPPIs, the vGUPPIs provide more direct evidence on unilateral pricing incentives than other metrics commonly carried out in vertical merger cases, such as concentration indices and vertical arithmetic. They also are simpler to implement and require less data than merger simulation models.

The Appendix:
The Appendix supplements the technical analysis in the Moresi and Salop Vertical GUPPI article published in the Antitrust Law Journal.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2368872

Keywords: antitrust review of vertical mergers, input foreclosure, upward pricing pressure

JEL Classification: K21, L40

Suggested Citation

Moresi, Serge and Salop, Steven C., vGUPPI: Scoring Unilateral Pricing Incentives in Vertical Mergers (June 18, 2012). Antitrust Law Journal , Vol. 79, pp. 185-214, 2013; Georgetown Law and Economics Research Paper No. 12-022. Available at SSRN: https://ssrn.com/abstract=2085999 or http://dx.doi.org/10.2139/ssrn.2085999

Serge Moresi (Contact Author)

Charles River Associates (CRA) ( email )

1201 F Street, NW
Suite 700
Washington, DC 20004
United States
(202)662-3847 (Phone)

Steven C. Salop

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States
202-662-9095 (Phone)
202-662-9497 (Fax)

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