Upward pricing pressure as a predictor of merger price effects |
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| Institution: | 1. Georgetown University, McDonough School of Business, 37th and O Streets NW, Washington, DC 20057, United States;2. Swarthmore College, Department of Economics, 500 College Avenue, Swarthmore, PA 19081, United States;3. University of Minnesota, Department of Economics, United States;4. U.S. Department of Justice, Antitrust Division, Economic Analysis Group, 450 5th St. NW, Washington, DC 20530, United States;1. Kansas State University, Department of Economics, 322 Waters Hall, Manhattan, KS 66506, United States;2. East Tennessee State University, Department of Economics and Finance, 227 Sam Wilson Hall, Johnson City, TN 37614, United States;1. ICREA-Universitat Pompeu Fabra and Barcelona School of Economics;, Ramon Trias-Fargas 25-27, 08005 Barcelona, Spain;2. LUISS Department of Economics and Finance, Viale Romania 24, 00124 Rome, Italy |
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| Abstract: | We use Monte Carlo experiments to evaluate whether “upward pricing pressure” (UPP) accurately predicts the price effects of mergers, motivated by the observation that UPP is a restricted form of the first order approximation derived in Jaffe and Weyl (2013). Results indicate that UPP is quite accurate with standard log-concave demand systems, but understates price effects if demand exhibits greater convexity. Prediction error does not systematically exceed that of misspecified simulation models, nor is it much greater than that of correctly-specified models simulated with imprecise demand elasticities. The results also support that UPP provides accurate screens for anticompetitive mergers. |
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