AN EMPIRICAL COMPARISON BETWEEN THE UPWARD PRICING PRESSURE TEST AND MERGER SIMULATION IN DIFFERENTIATED PRODUCT MARKETS

Abstract

The Upward Pricing Pressure (UPP) test is a new merger screen that focuses on price effects instead of concentration changes. This article is one of the first to compare its empirical predictions against that of merger simulations. This is valuable for practitioners and economists alike, because it shows the extent to which a quick screening tool will lead to the same decision as a structural framework for market analysis. I use hypothetical mergers in a big cross-section of airline route markets to assess UPP's sign, rank, and magnitude predictions. In its “best case scenario,” it gives correct sign predictions in 90-percent observations; correct decile predictions in 75-percent observations; and a mean magnitude difference of $17, when compared against merger simulations. I investigate the performance of both the first and second terms of the UPP using different hypothetical mergers. Lastly, I explore whether certain market or product characteristics lead to large discrepancies in the UPP using model selection techniques.