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

See all articles by Daniel Greenfield

Daniel Greenfield

U.S. Federal Trade Commission - Bureau of Economics

Jeremy Sandford

Compass Lexecon

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

Greenfield, Daniel and Sandford, Jeremy, Upward pricing pressure in mergers of capacity-constrained firms (April 12, 2021). Daniel Greenfield & Jeremy Sandford, "Upward pricing pressure in mergers of capacity-constrained firms," Economic Inquiry (forthcoming 2021), Available at SSRN: https://ssrn.com/abstract=3283761 or http://dx.doi.org/10.2139/ssrn.3283761

Daniel Greenfield (Contact Author)

U.S. Federal Trade Commission - Bureau of Economics ( email )

601 Pennsylvania Avenue, NW
Washington, DC 20580
United States

Jeremy Sandford

Compass Lexecon ( email )

555 12th St NW
Washington, DC 20004
United States

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