LAW & ECONOMY : MERGERS - DIFFERENTIATED PRODUCTS - DEFINITION’S MARKET - UPP TEST - FARRELL AND SHAPIRO TEST

Economics of monopolies with differentiated products

Evaluating of the effects, on competition on the market, of mergers between companies that provide differentiated products is complex; it is not so much the definition of the market or the position of the parties that matter, but the ability of the new entity to raise prices profitably. The traditional analysis, based on the observation of market concentration therefore being of limited use, this naturally lead to consider additional, if not alternative, methods. Economists Joseph Farrell and Carl Shapiro have proposed a new simple test for a preliminary assessment, to determine whether a proposed merger between competitors is likely to reduce competition and therefore to lead to higher prices. This test, referred to as "Upward Pricing Pressure" ("UPP"), is not based on an index of concentration, but on a price analysis. This proposal is interesting in sofar as it helps to highlight the difficulties underlying the application of the current merger control to certain markets. However, these difficulties are inherent to the merger control process and the Farrell and Shapiro test does not simplify the process sufficiently to justify its adoption in the European context. Their method raises many questions and has limitations and disadvantages. Finally, their proposal seems mainly motivated by the desire to "simplify the work" of control authorities, probably to the detriment of market operators.

*This article is an automatic translation of the original article, provided here for your convenience. Read the original article. Oligopolies with differentiated productsIntroductory remarks Layered Underlay Chief Economist of the Competition Authority 1. The models of imperfect competition developed by French economists Joseph Bertrand (1883) and Antoine-Augustin Cournot (1838) allowed a move away from "pure and perfect competition" models that assumed that firms were all "price-takers" rather than "price-makers". These models, which allowed an initial analysis of situations of imperfect competition and strategic interactions between companies (where a company's decisions have an impact on the profits - and thus ultimately on the decisions - of its competitors), nevertheless

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Olivier Fréget, Charlotte Beauchataud, Thibaud Vergé, Jeanne Lubek, Economics of monopolies with differentiated products, September 2010, Concurrences N° 3-2010, Art. N° 31857, www.concurrences.com

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