Cost Efficiencies and Upward Pricing Pressure
45 Pages Posted: 31 Jan 2019
Date Written: December 18, 2018
We investigate the accuracy of UPP as a tool in antitrust analysis when there are cost efficiencies from a horizontal merger. We include model-based, merger-specific cost efficiencies in a tractable manner and extend the standard UPP formulation to account for these efficiencies. The efficacy of the new UPP formulations is analyzed using Monte Carlo simulation of 40,000 mergers (8 scenarios, 5,000 mergers in each scenario). We find that the new UPP formulations yield substantial gains in prediction of post-merger prices, as compared to existing practice, and there are substantial gains in merger screening accuracy as well. Moreover, the new UPP formulations outperform the standard UPP formulation at higher thresholds for all the standard cases in the paper. The results support the inclusion of model-based cost efficiencies in the standard UPP formulation for more accurate antitrust decision-making.
Keywords: Upward Pricing Pressure, Merger Efficiency, Monte Carlo, UPP, Mergers, Antitrust, Unilateral Effects, Cost Efficiencies
JEL Classification: K21, L11, L41, L13
Suggested Citation: Suggested Citation