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15 bd Gabriel Péri 92245 Malakoff Cedex France www.crest.fr SIRET : 130 014 228 00048 APE : 8542 Z
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15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• UPP – Upward Pricing Pressure UPPA = (PB-cB) DRAB – EAcA
Several variants proposed later by Schmalensee, Farrell and Shapiro, Epstein and Rubinfeld.
• UPP is A simple screen based on relatively limited information.
A screen that deals with product differentiation in a satisfactory manner.
A screen that can “easily” be implemented by merging parties themselves (not true for the hypothetical monopolist test or HHI-based screens).
• UPP is only a first stage screen not the end of the competitive analysis.
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• GUPPI – Gross Upward Pricing Pressure Index GUPPI = (PB-cB) DRAB / PA
The term (PB-cB) DRAB is exactly the opportunity cost for the new entity of trying to increase the sales of product A by one unit. Can be seen as an equivalent marginal cost increase (for product A) due to the merger.
If the pass-through rate is known, then GUPPi * Pass-through gives you a measure of the anticipated price increase.
• IPR – Illustrative Price Rise More complex in asymmetric cases.
In symmetric cases, simple formula: • Linear-demand: IPRIso = DR * margin rate / (1 – margin – DR)
• Iso-elastic demand: IPRLinear = DR * margin rate / (2*(1 – DR))
• Remark: IPRIso > 2 IPRLinear !
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Market shares may be informative but only if markets are precisely defined. “The problem with the SSNIP (…) is that it is really a thought experiment.
The SSNIP test is something that you could never do empirically in practice. (…) [I]f you want to empirically do the SSNIP test, you actually need more information than you would need for a merger simulation.” (K-U. Kühn,
Fordham 2012)
“Market definition (…) is a complicated process that requires the application of certain economic skills and considerable creativity in order to reach approximately the correct solution.” (M. Glassman, Antitrust Law Journal,
1980).
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Deal with product differentiation. HHI and market-share based screens don’t.
Market definition is now often done by using information on diversion ratios. Not too dissimilar to price pressure screens.
• Required limited information (only on the merging parties). Much less information required than to carry out a proper SSNIP test.
• Not more imperfect than market-share based screens.
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Estimating price-cost margins Test should be carried out using marginal cost (average incremental cost)
rather than average variable cost (or even more than average cost).
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Estimating diversion ratios Deriving diversion ratios from pre-merger market shares.
• Then back to market-share based screens! Pointless.
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Estimating diversion ratios Deriving diversion ratios from pre-merger market shares.
• Then back to market-share based screens! Pointless.
Predicting diversion ratios from product characteristics and past experience.
• Not useful as a self-evaluation exercises for firms.
• Very imprecise. See examples in Walters (2007).
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Example (assuming symmetry): Margins 25% but with margin of error of +/- 5%.
Diversion ratio is 20% but with a margin of error of +/- 5%.
• Values for GUPPI and IPR with RD=20% and m=25% GUPPI = 5.0%
IPR = 3.1% (for linear demand) / 9.1% (for iso-elastic demand)
• But range of possible values GUPPI between 3.0% and 7.5%
IPR between 1.8% and 5.0% (linear) or between 4.6% and 16.7% (iso-elastic).
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Estimating diversion ratios Deriving diversion ratios from pre-merger market shares.
• Then back to market-share based screens! Pointless.
Predicting diversion ratios from product characteristics and past experience.
• Not useful as a self-evaluation exercises for firms.
• Very imprecise. See examples in Walters (2007).
Estimating a demand model and then computing diversion ratios.
• Potentially quite precise estimates but difficult to implement given the time constraints.
• Why stop at price pressure screens when most of the work has already been done for merger simulation?
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Estimating diversion ratios Customer switching patterns
• Switching often occur in reaction to multiple price changes. Difficult to disentangle the different effects.
Customer surveys • Often used for instance by the OFT or the UK Competition Commission in
mergers between retail chains.
• Issue here: number of potential switchers (if the marginal and the average consumers have different switching patterns, we should care only about the marginal ones), how to people react (on paper) to small price changes?
Evidence from firms themselves. Firms tend to care about losing / gaining business relative to their competitors. • Here again identifying the marginal customers maybe an important issue.
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Cheung (2009) Looks at overlapping routes in the America West – US Airways 2005
merger.
Uses pre-merger data to simulate the anticipated price effects of the merger (assuming efficiency gains).
Uses the estimated demand parameters to compute diversion ratios and therefore UPPs.
• Foncel, Ivaldi and Khimich (2013) Simulate a large number of “economies”.
Simulate the price effects of mergers in those economies.
Compare that with predictions made using HHI screens or UPP tests.
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Use available data to estimate the parameter of the demand model. • Make some assumptions on the competition model and use that to
recover cost parameters. Based on equilibrium conditions. Sometimes available data on cost may also help to select the best “structural
model”.
• Simulate the post-merger equilibrium using the estimated demand and cost functions. Possibility to introduce efficiency gains. Possibility to allow firms to withdraw products or reposition products.
• Evaluate the effect of the merger on prices but also on consumer surplus. Effect on consumer surplus is needed especially when some prices go up while
other decrease.
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Price pressure screens are relatively easy to implement and require limited information. Prices, costs and diversion ratios for the parties’ products only.
Useful as a screen at an early stage when the clock is ticking fast!
• Merger simulation is clearly more sophisticated and precise but that takes time! Useful at later stages (for instance in phase II) but given the time it may
take simply to collect the necessary data, it is often necessary to think about it very early.
Not always easy, as it could involve collecting data even before knowing whether it will be used or not!
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Almost Ideal Demand Systems (AIDS) Very flexible substitution patterns.
But number of parameters to be estimated can quickly become too large.
• Logit / Nested Logit / Random Coefficient (Nested) models Less flexible substitution patterns (especially for simpler models such as
Logit and Nested Logit).
But fewer parameters to be estimated.
• Choice of model may influence the simulation results.
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Ex-post evaluation of implemented mergers. Compare the “actual” effect of the merger with the anticipated impact
(simulated impact).
• Chex / General Mills Simulation (Nevo, Rand Journal of Economics 2000) vs. ex-post evaluation
(Ashenfelter and Hosken, Journal of Law and Economics 2011).
On average simulation does a good job. • Anticipated price increase for major brands was about 2%, actual was 3%.
But results are not as good when looking at individual brands. • No actual effect vs. large predicted price increase (12%) for the small firm.
• Larger actual price increases (3 to 4% vs. 1 to 2%) for the larger firm.
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• How to account for vertical interactions? For instance in many cases, merger involves suppliers.
Available data: prices and quantities sold by retail stores.
Simulations usually abstract from considering vertical interactions between suppliers and retailers.
• See for instance Unilever / Sara Lee.
Imperfect but is it possible to do better in such a short time?
Need more robust theoretical framework.
15 bd Gabriel Péri
92245 Malakoff Cedex
France
www.crest.fr SIRET : 130 014 228 00048
APE : 8542 Z
• Price pressure screens and merger simulations are extremely useful tools.
• But: They are two very different instruments and need to be seen as such
• Price pressure screens are only screens.
Tests / simulations have be done with the right data. (Data availability may limit the ability to use such instruments).
Merger simulations are more precise but may still be imperfect. There are therefore one of the elements helping to take a decision, not the one and only.
