Cost Efficiencies and Upward Pricing Pressure

Jessica Dutra and Tarun Sabarwal
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Jessica Dutra: Department of Economics, The University of Kansas

No 201901, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: L11 L13 L41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2018-12
New Economics Papers: this item is included in nep-com and nep-ind
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