Developments in Unilateral Effects Analysis: Price Pressure Tests

Abstract

Arguably the most significant development in horizontal merger assessment in recent years, particularly in the UK and the US, has been the increased use of price pressure tests/indices, which use a relatively limited amount of data from the merging parties and a simple formula to provide an indication of whether a merger is likely to give rise to an increase in prices, i.e. to cause upward pricing pressure. These indices are intended to better capture the extent to which the merging parties are close competitors and hence may be more informative than traditional market share based screens when assessing the prospects for a merger to give rise to unilateral effects in a differentiated products setting. The first part of the paper will review the economics of horizontal mergers and explain the underlying economic intuition upon which pricing pressure indices are based. The paper will then set out the most commonly used of these indices and describe how they may be implemented, elaborating on the empirical inputs and assumptions required, drawing on relevant case law where appropriate. Finally, the paper will comment on the likely future implications of using these indices for merger assessment in South Africa, and the extent to which price pressure indices may be probative regarding the prospects for unilateral effects more generally.