Tuesday, April 23, 2013
UPP Merger Screens: Incorporating Efficiencies and Feedback Effects into the Value of Diverted Sales
Posted by D. Daniel Sokol
Bertram Neurohr, Compass Lexecon addresses UPP Merger Screens: Incorporating Efficiencies and Feedback Effects into the Value of Diverted Sales.
ABSTRACT: This paper extends the conventional UPP merger screen (i) to account for merger-specific marginal cost efficiencies for both merging firms, and (ii) to account for feedback effects between the merging firms. What emerges is a test that is algebraically equivalent to the test developed by Werden (1996), and yet as intuitive and transparent as UPP. Given the extremely widespread use of UPP in recent years, one of the objectives of this paper is to encourage the use of a more accurate test by fully illuminating its underlying economic logic. To this end this paper shows that accounting for additional effects does not lead to a significant increase in complexity while at the same time having a profound impact on the explanatory power of the merger screen. This follows from the fact that the value of diverted sales naturally depends on both efficiencies and feedback. Besides making the increased accuracy of Werden’s test accessible to policy makers in the form of a more intuitive test, this paper brings closure to the debates surrounding the roles of efficiencies and feedback effects in UPP. It is shown that the proposed test is difficult to improve upon within the class of local tests, which do not require assumptions about the shape of the demand curve. The increased logical consistency of the test is exploited to illustrate its close connection to price changes using a linear demand example.