Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition

Joseph Farrell () and Carl Shapiro

Competition Policy Center, Working Paper Series from Competition Policy Center, Institute for Business and Economic Research, UC Berkeley

Abstract: We propose a simple, new test for making an initial determination of whether a proposed merger between rivals is likely to reduce competition and thus lead to higher prices. Under current antitrust policy, the government can establish a presumption that a proposed horizontal merger will harm competition by defining the relevant market and showing that the merger will lead to a substantial increase in concentration in that market. However, this approach can perform poorly in markets for differentiated products, where market boundaries are unclear and the proximity of the products sold by the merging firms is a key determinant of the merger's effect on competition. Our test looks for upward pricing pressure (UPP) resulting from the merger. We develop a simple diagnostic for UPP based on the price/cost margins of the products sold by the merging firms and the magnitude of direct substitution between the two firm's products. We argue that our approach is well grounded in economics, workable in practice, and superior to existing methods in a substantial class of mergers.

Keywords: antitrust; merger policy; unilateral effects; oligopoly; market definition (search for similar items in EconPapers)
Date: 2008-11-25
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition (2010)
Working Paper: Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition (2008)
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