Abstract

The importance of economics to the analysis and enforcement of competition policy and law has increased tremendously in the developed market economies in the past 40 years. In younger and developing market economies, competition law itself has a history of 20–25 years at most—sometimes much less—and economic tools that have proven useful to competition law enforcement in developed market economies in focusing investigations and in assisting decision makers in distinguishing central from secondary issues are inevitably less well understood. This paper presents a non-technical introduction to three economic tools that have become widespread in competition law enforcement in general and in the analysis of proposed mergers in particular: critical loss analysis, upward pricing pressure, and the vertical arithmetic. The first is used primarily in the context of horizontal mergers for both market definition and the analysis of potential competitive effects from the merger, while the second and third are used primarily in the analysis of potential competitive effects, the second in horizontal mergers and the third in vertical mergers.

Highlights

  • The importance of economics to the analysis and enforcement of competition policy and law has increased tremendously in the developed market economies in the past 40 years

  • In younger and developing market economies, competition law itself has a history of 20–25 years at most—sometimes much less—and economic tools that have proven useful to competition law enforcement in developed market economies in focusing investigations and in assisting decision makers in distinguishing central from secondary issues are inevitably less well understood

  • This paper presents a non-technical introduction to three economic tools that have become widespread in competition law enforcement in general and in the analysis of proposed mergers in particular: critical loss analysis, upward pricing pressure, and the vertical arithmetic

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Summary

Introduction

The importance of economics to the analysis and enforcement of competition policy and law has increased tremendously in the developed market economies in the past 40 years. This paper presents a non-technical introduction to three economic tools that have become widespread in competition law enforcement in general and in the analysis of proposed mergers in particular: critical loss analysis, upward pricing pressure, and the vertical arithmetic. All three are discussed extensively in the economics and legal literature, so that an introduction inevitably gives inadequate attention to some corollaries and complexities. This is a U.S Government work and not under copyright protection in the US; foreign copyright protection may apply 2018.

Critical Loss Analysis
Critical Loss Analysis for Market Definition
Implicit Elasticities
Cost Estimates
The SSNIP
Market Definition Is Not the Whole Story
Critical Loss Analysis for Unilateral Effects Analysis
Upward Pricing Pressure
How to Use GUPPI?
GUPPI to UPP
The Diversion Ratio
The Limits of UPP and GUPPI
The Vertical Arithmetic
Findings
Conclusion

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