Horizontal Merger and Upward Pricing Pressure in a Bertrand-Cournot Model

Abstract

The upward pricing pressure (UPP) proposed by Farrell and Shapiro (2010a) is a significant advance in the horizontal merger literature and practice. However, the indicator is designed for a particular pre-merger scenario: the Bertrand-type competition. Here, we propose an indicator for a Bertrand-Cournot duopoly pre-merger scenario, shedding light on this assumption's role in the UPP. Besides, we assess the effect of the degree of product differentiation on UPP. Results indicated that the upward pricing pressure caused by a merger depends on the pre-merger competition, with the Bertrand-Cournot having a higher UPP than the Bertrand scenario. The degree of product differentiation also matters for the UPP -merged firms that produce more homogeneous products have a higher probability of causing upward pricing pressure in post-merger. Our findings help the antitrust authority analyze firms' mergers, indicating that these two features need to be better observed: the pre-merger competition scenario and firms' product differentiation.