Upward pricing pressure in mergers of capacity‐constrained firms

Daniel Greenfield and Jeremy A. Sandford

Economic Inquiry, 2021, vol. 59, issue 4, 1723-1747

Abstract: Merging firms regularly argue that mergers involving capacity‐constrained firms are unlikely to be anticompetitive, because a capacity‐constrained firm does not represent a meaningful competitive constraint on its rivals. We construct a modified notion of upward pricing pressure called ccGUPPI, or capacity‐constrained GUPPI, which accounts for upward pricing pressure from binding capacity constraints, in addition to standard merger effects. We show that the pricing pressure terms underlying ccGUPPI, calculated using premerger data, are sufficient to determine whether a merger of capacity‐constrained firms will increase price, irrespective of the functional form of demand. Further, using Monte Carlo simulation, we show that ccGUPPI is generally a useful proxy for actual price effects, with lower informational requirements than full merger simulation.

Date: 2021
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