Upward pricing pressure in mergers of capacity-constrained firms
Daniel Greenfield & Jeremy Sandford, "Upward pricing pressure in mergers of capacity-constrained firms," Economic Inquiry (forthcoming 2021)
40 Pages Posted: 13 Nov 2018 Last revised: 12 Apr 2021
Date Written: April 12, 2021
Abstract
Merging firms regularly argue that mergers involving capacity-constrained firms are unlikely
to be anticompetitive, because a capacity-constrained firm does not represent a meaningful competitive constraint on its rivals. We construct a modified notion of upward pricing pressure called ccGUPPI, or capacity-constrained GUPPI, which accounts for upward pricing pressure from binding capacity constraints, in addition to standard merger effects. We show that the pricing pressure terms underlying ccGUPPI, calculated using pre-merger data, are sufficient to determine whether a merger of capacity-constrained firms will increase price, irrespective of the functional form of demand. Further, using Monte Carlo simulation, we show that ccGUPPI is generally a useful proxy for actual price effects, with lower informational requirements than full merger simulation.
Keywords: Antitrust, Mergers, Capacity Constraints, Upward Pricing Pressure, Monte Carlo Experiments
JEL Classification: K21, L10, L40
Suggested Citation: Suggested Citation