Merger Screens : Market-Share Based Approaches and 'Upward Pricing Pressure'

The US Department of Justice and Federal Trade Commission receive notification regarding thousands of mergers per year, and must identify, from the entire set of mergers, those that require further investigation. Merger screens are critical to efficient and effective merger enforcement policy, but traditional market share-based screens are often ineffective. An alternative approach is based on the concept of "upward pricing pressure," or UPP, which is a measure of the strength of the merged firm's incentive to increase price above pre-merger levels. In this article, we examine whether UPP would provide a useful screening device that the Agencies could use during the initial waiting period to decide whether a Second Request should be issued. We begin our analysis by providing an alternative derivation of UPP and show that UPP flows from the familiar logic of unilateral effects. We then discuss why reliable estimates of the three key inputs to UPP -- diversion ratios, gross profit margins, and efficiencies -- are unlikely to be available during the initial waiting period, thereby limiting the extent to which UPP can be a useful screen in the first thirty days