Upward pricing pressure in mergers of capacity‐constrained firms

Merging firms regularly argue that mergers involving capacity‐constrained firms are unlikely to be anticompetitive, because a capacity‐constrained firm does not represent a meaningful competitive constraint on its rivals. We construct a modified notion of upward pricing pressure called ccGUPPI , or capacity‐constrained GUPPI , which accounts for upward pricing pressure from binding capacity constraints, in addition to standard merger effects. We show that the pricing pressure terms underlying ccGUPPI , calculated using premerger data, are sufficient to determine whether a merger of capacity‐constrained firms will increase price, irrespective of the functional form of demand. Further, using Monte Carlo simulation, we show that ccGUPPI is generally a useful proxy for actual price effects, with lower informational requirements than full merger simulation.