Upward pricing pressure as a predictor of merger price effects

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 both UPP and the HHI change provide accurate screens for anticompetitive mergers.

Understanding the Price Effects of the MillerCoors Joint Venture

“…Diversion from k to j is analogous, meaning that the sum of the approximate diversion ratios is s j + s k + 2s j s k or, equivalently, s j + s k + HHI. We first encountered these mathematics inShapiro (2010) Miller, Remer, Ryan, and Sheu (2017). provided Monte Carlo evidence that HHI is highly correlated with unilateral price effects in the specific setting of proportional substitution.7 This replicates the analysis ofAshenfelter, Hosken, and Weinberg (2015), who estimated equation(2)with proprietary IRI data spanning 2007-2011 and 47 geographic markets.…”

The accuracy of hospital merger screening methods

“…However, Miller et al. () use Monte Carlo methods to evaluate the accuracy of UPP and find that it is a good predictor of post‐merger price changes, even absent pass‐through adjustment.…”

Merger Review for Markets with Buyer Power

“…62 It may also be valuable in future research to explore the implications of our results for merger screens. Preliminary screens for merger effects, such as measures of upward pricing pressure or the change in the Herfindahl-Hirschman Index, have proven useful to antitrust authorities (see, e.g., Miller et al, 2016). Our model, combined with parametric assumptions on the family of cost functions, could provide the foundation for a preliminary screen for mergers in procurement markets by allowing one to calculate, as a function of market shares and the extent to which the buyer's value exceeds suppliers' maximum cost, the level of cost synergies required to eliminate harm to the buyer.…”