The Upward Pricing Pressure Test and the Sensitivity of the Diversion Ratio

Lydia Cheung ()
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Lydia Cheung: Department of Economics, Faculty of Business and Law, Auckland University of Technology

No 2014-08, Working Papers from Auckland University of Technology, Department of Economics

Abstract: The diversion ratio is a key ingredient to the calculation of the Upward Pricing Pressure (UPP) test, which is a new shortcut for screening mergers. It measures the degree of substitutability between the merging goods, which affects the potential for price increase post-merger. There is currently little existing research on how the diversion ratio is to be estimated (unlike its cousin, the cross-price elasticity). This paper explores one of the methods to estimate diversion ratios, which is through the estimation of a demand system. Specifically, this paper shows that the estimated value of the diversion ratio is, in fact, little affected by one of the most contentious decisions in merger analysis: the definition of the market boundary.

Keywords: Upward pricing pressure; mergers (search for similar items in EconPapers)
Pages: 11 pages
Date: 2014-11
New Economics Papers: this item is included in nep-com
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