Unilateral Effects of Mergers Benjamin Firn Gerald Lucey Jimmy Hill
Abstract Purpose of paper is to investigate an
“upward pricing pres-sure (“UPP”) tool for analyzing unilateral competitive effects of horizontal mergers on differentiated products that is featured in the 2010 Guidelines.”
Willig, Robert. “Unilateral Competitive Effects of Mergers.” Page 19.
Benefits of Mergers Increased Market Share Decreased Costs Increased Quality of Product
(“hedonic” quality adjusted prices)
Economies of Scale
Wiriadinata, Michael. “Economies of Scale, Scope and Learning Curve.” Page 1.
Assignment
“Unilateral Competitive Effects of Mergers: Upward Pricing Pressure, Product Quality, and Other Extensions” by Robert Willig
Abstract Upward Pricing Pressure 2010 Guidelines The GUPPI, Marginal Cost Efficiencies and UPP Calibration UPP With Merger Impacts on Product Quality Multiproduct UPP Analysis UPP Analysis of Partial Equity Stakes Upward Market Power Pressure: Price Increases and Output Decreases Conclusion
Key Terms UPP GUPPI “Hedonic Prices” Diversion Ratio Diverted Sales Economies of Scale Cross Elasticity of Demand
Notation Key
Firm 1 Profit Maximization
Merger Profit Maximization
Firm 1 Bertrand Equilibrium
Firm 2 Bertrand Equilibrium
Merger Profit Maximization
Merger Price Indicator Prelude
Firm 1 Exclusion Extension
Diverted Sales Indicator
Diversion Ratio
What is the Diversion Ratio Willig’s Definition: “The diversion
ratio between goods 1 and 2 is the fraction of the sales that a price rise suppresses of good 1 that divert to good 2”.
Shapiro’s Definition: “If the price of Brand A were to rise, what fraction of the customers leaving Brand A would switch to Brand B?”Willig, Robert. “Unilateral Competitive Effects of Mergers.” Page 26.Shapiro, Carl . “Mergers with Differentiated Products.” Page 1.
Diversion Ratio Example Assume Coke and Pepsi Merge Pre-Merger: Pc = $1 Pp = $1.50 Qc = 10(-Pc + Pp) Qp = 7(-Pp +
Pc) What is the diversion ratio?
Diversion Ratio Twist What happens when the diversion
ratio is 1? What does this mean? Under what conditions should the
firm raise its post-merger price?
The Math
Math Continued…
Is a Diversion Ratio of 1 realistic?
Pepsi/Coke in real life Duopolistic Competition Cross Elasticity of Demand
Brand Loyalty
What is the GUPPI? DOJ
• Horizontal Merger Guidelines 0f 2010 UPP (Price Increases) Social Welfare
Formula for GUPPI
Willig, Robert. “Unilateral Competitive Effects of Mergers.” Page 26.
CRA. “Scoring Unilateral Effects with the GUPPI.” Page 4.
Hedonic Prices
Willig, Robert. “Unilateral Competitive Effects of Mergers.” Page 29.
Weaknesses of GUPPI Other firms and consumers reacting
to the merger is unaccounted for Market Entry Product Repositioning
Practicality of GUPPI Judges are not economists Both sides estimate their own UPP Ambiguity (3.8% of cases flagged
between 1988 – 2005) Good way to screen for potential anti-
trust cases
Wienberg, Matthew. “The Price Effects of Horizontal Mergers.” Page 1.
Corona and Budweiser Anheuser-Busch proposed $20.1 for Grupo
Modelo Projected to affect half of $80 billion sales in
market DOJ feared “the deal could lead to higher
beer prices in this country because it would reduce competition in the U.S. beer market.”
Assistant Attorney General cites “The big folks were working hard to set price increases and Modelo was a significant constraint.”
The Inquisitr. “Price of Beer Saved: Corona And Budweiser Merger Denied by DOJ.” Page 1
Works Cited Willig, Robert. “Unilateral Competitive Effects of
Mergers.” Pages 20 – 37. The Inquisitr. “Price of Beer Saved: Corona And
Budweiser Merger Denied by DOJ.” Page 1. Weinberg, Matthew. “The Price Effects of
Horizontal Mergers.” Pages 1 – 21. CRA. “Scoring Unilateral Effects with the GUPPI.”
Pages 1 - 6. Shapiro, Carl . “Mergers with Differentiated
Products.” Page 1 - 8. Wiriadinata, Michael. “Economies of Scale, Scope
and Learning Curve.” Page 1.