Online Program

Cost Efficiencies and Upward Pricing Pressure (304797)

Keywords: Upward Pricing Pressure, Monte Carlo, Mergers, Cost Efficiency

Efficiency claims in antitrust cases as a pro-competitive defense has a long dichotomous history fluctuating between theoretical acceptance and practitioner's skepticism. Upward Pricing Pressure, as a merger screening tool, allows for the inclusion of efficiencies within the index as a change between pre and post marginal costs. This paper extends this framework to incorporate merger efficiencies with more theoretical rigor, resultant from a more general cost function as opposed to the simple change in marginal cost often implemented in merger simulation. The proposed methodology is more tractable and compatible with previous literature in estimation of sub-additivity of cost functions post-consolidation as well as allows models to be calibrated to better reflect antitrust policy on efficiency claims. Our Monte Carlo study shows that our proposed methodology behaves equally as the previous in the absence of efficiencies, and much better with efficiencies. This has the potential to improve current antitrust merger screening.