Upward Pricing Pressure in Oligopoly With Competitive Fringe

Abstract

Farrell and Shapiro (F&S, 2010) proposed an Upward Pricing Pressure (UPP) approach to merger screening between two symmetrical firms. According to them, this UPP approach is more practical than concentration-based methods. However, it fails because it does not incorporate all the theoretical effects which set the price. This article sets out to close two specific gaps in the UPP. First, the case of the industry which has a set of firms with asymmetric costs is addressed. Mathiesen et al. (2012) show that UPP screening could present a false-positive in asymmetric cases. To correct this, the study includes a competitive fringe in the feedback effects, and thereby rectifies the symmetric and asymmetric effects in pricing pressure. Second, when the asymmetric effect comes from only dominant side, the lack of representativeness of demand is then addressed. The study shows that the model presented by F&S is valid only for cases where the elasticity of demand is unitary. If that is not the case, the original model is biased. Finally, after filling both gaps, the validity of the relevant-market term in industrial organization is discussed and was concluded to be out of date. For the authors, the regulator just needs to set a channel between products in a convex set to establish a merger screening.