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An Empirical Comparison Between The Upward Pricing Pressure Test Andmerger Simulation In Differentiated Product Markets

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  • Lydia Cheung

Abstract

The Upward Pricing Pressure (UPP) test is a new merger screen that focuses onprice effects instead of concentration changes. This article is one of the firstto compare its empirical predictions against that of merger simulations. This isvaluable for practitioners and economists alike, because it shows the extent towhich a quick screening tool will lead to the same decision as a structuralframework for market analysis. I use hypothetical mergers in a big cross-sectionof airline route markets to assess UPP's sign, rank, and magnitude predictions.In its “best case scenario,” it gives correct sign predictions in 90-percentobservations; correct decile predictions in 75-percent observations; and a meanmagnitude difference of $17, when compared against merger simulations. Iinvestigate the performance of both the first and second terms of the UPP usingdifferent hypothetical mergers. Lastly, I explore whether certain market orproduct characteristics lead to large discrepancies in the UPP using modelselection techniques.

Suggested Citation

  • Lydia Cheung, 2016. "An Empirical Comparison Between The Upward Pricing Pressure Test Andmerger Simulation In Differentiated Product Markets," Journal of Competition Law and Economics, Oxford University Press, vol. 12(4), pages 701-734.
    • Handle: RePEc:oup:jcomle:v:12:y:2016:i:4:p:701-734.
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    File URL: http://hdl.handle.net/10.1093/joclec/nhw026
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    Citations

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    Cited by:

    1. Jéssica Dutra & Tarun Sabarwal, 2020. "Antitrust analysis with upward pricing pressure and cost efficiencies," PLOS ONE, Public Library of Science, vol. 15(1), pages 1-31, January.
    2. Russell Pittman, 2018. "Three Economist’s Tools for Antitrust Analysis: A Non-technical Introduction," Contributions to Economics, in: Boris Begović & Dušan V. Popović (ed.), Competition Authorities in South Eastern Europe, pages 155-172, Springer.
    3. Cosnita-Langlais, Andreea & Johansen, Bjørn Olav & Sørgard, Lars, 2021. "Upward pricing pressure in two-sided markets: Incorporating rebalancing effects," International Journal of Industrial Organization, Elsevier, vol. 74(C).
    4. Andreea Cosnita-Langlais & Bjørn Olav Johansen & Lars Sorgard, 2018. "Upward Price Pressure in Two-Sided Markets: Incorporating Feedback Effects," Working Papers hal-04141797, HAL.
    5. Lydia Cheung, 2016. "Antitrust Market Definition and the Sensitivity of the Diversion Ratio," Working Papers 2016-02, Auckland University of Technology, Department of Economics.
    6. Jessica Dutra & Tarun Sabarwal, 2018. "Cost Efficiencies and Upward Pricing Pressure," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201901, University of Kansas, Department of Economics.

    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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