Critical Efficiencies as Upward Pricing Pressure with Feedback Effects

Neurohr Bertram ()
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Neurohr Bertram: Oxera, John F. Kennedy Haus, Rahel-Hirsch-Straße 10, 10557, Berlin, Germany

The B.E. Journal of Theoretical Economics, 2019, vol. 19, issue 1, 7

Abstract: Farrell and Shapiro’s upward pricing pressure (‘UPP’) is widely used in merger analysis due to its intuitiveness, despite not accounting for the interdependence between the merging firms’ pricing incentives (‘feedback effects’). However, ignoring feedback effects can have an impact on the way competition authorities rank mergers. The main result of this article is that UPP with feedback effects is equivalent to Werden’s critical efficiencies. Importantly, this link allows for the derivation of an expression that combines the intuition of UPP as the ‘value of diverted sales’ with the accuracy of critical efficiencies. Throughout, the focus is on the static unilateral effects of horizontal mergers with differentiated Bertrand competition.

Keywords: mergers; UPP; efficiencies; feedback effects (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/bejte-2017-0049

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