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.