COMPETITION • EUROPEAN LAW • MERGERS
The UPP (upward pricing pressure) test is one of the quantitative tests used by the competition authorities to make an initial assessment of the possibility of a unilateral effect resulting from a concentration. According to the merger guidelines, the UPP test consists of taking into account the merging firms’ incentive to raise prices due to the internalization of the effects of price increases on the products acquired further to the transaction, but also the incentives to reduce its prices which could occur as a result of efficiency gains generated by the merger. It Is necessary to analyze the net effect : if it is positive, the transaction is likely to lead to an increase in prices; if negative, it can be considered to be favorable to consumers.
In the simplest version of the test (i.e. a merger between two single-product firms A and B), the net incentives to increase the price of product A depend on the sign of the expression (pB-(1-E)cB)RDA/B –EcA, where cB and pB are respectively the cost (marginal) and the price of product B (before the transaction), cAis the marginal cost of product A, RDA/B measures the diversion ratio from A to B (i.e. the proportion of sales lost by A as a result of the price increase of product A that are passed on to product B) and E is the efficiency “credit” retained by the Authority. The idea here is that when, as a result of an increase in its price, product A generates fewer sales, a fraction GDR/B of these sales is transferred to product B, which now generates a margin for the merged entity. As this margin was not internalized by undertaking A prior to the transaction, and is now higher due to the inclusion of efficiencies lowering the cost of product B, this additional margin creates an incentive to increase the prices of product A. This upward incentive is, however, offset by the fact that, due to the efficiencies lowering the cost of product A (and thus increasing the margin on product A), lost sales on product A are more costly after the merger..
In fact, the UPP test does not measure the size of the possible price increase, but merely indicates whether or not a price increase is to be expected. Moreover, if it takes into account efficiency gains, it is not a question of estimating the latter precisely, but only of granting a “credit” and examining whether, despite this “credit”, the concentration is likely to harm consumers or not. Above all, the use of the UPP test makes it possible to go beyond a mere analysis of the market shares of the merging parties and to assess, in greater detail, the proximity between their products and, consequently, the risks of the merger for competition.