How Accurate is the Coordinate Price Pressure Index to Predict Mergers’ Coordinated Effects?

Abstract

The Coordinate Price Pressure Index (CPPI) measures the incentives of two competitors to engage in a particular type of Parallel Accommodating Conduct (PAC). Specifically, it measures the incentives of a leader firm to initiate a unilateral percentage price increase, with the expectation that a follower firm will match it. Using a large set of simulated markets, we measure the accuracy of the index in terms of predicting the impact of a merger on firms’ incentives to engage in PAC. Results suggest that the CPPI only displays a fair performance when predicting an increase in firm’s incentives to engage in PAC, and only in mergers in which the diversion ratio between the target and the acquiring firm is low. However, the index displays a poor performance when predicting mergers with a significant anticompetitive effect.

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Reference

Marc Ivaldi, and Vicente Lagos, “How Accurate is the Coordinate Price Pressure Index to Predict Mergers’ Coordinated Effects?”, TSE Working Paper, n. 18-915, April 2018.