GUPPIs and Mergers of Firms Facing a One-Sided Pricing Problem
GUPPIs are among the most widely used tools by merger practitioners for screening horizontal mergers between firms facing a one-sided pricing problem. This tool allows for scoring the potential for incentives of the merging parties to engage in a unilateral increase in prices post-transaction, which diverts sales made by the post-transaction business of the acquiring firm.
To illustrate this, consider a simple example. Suppose that two hypothetical firms compete horizontally, and Firm 1 acquires Firm 2. If the merged entity were to increase the price of the product sold by Firm 1, then it would lose some of its customers. Part of these lost customers would be diverted to the merged entity’s competitors, but others would switch their purchases to the product sold by the acquired target, Firm 2. Thus, the merged entity would register a loss on customers who were diverted to the competitors’ products but would recapture sales and register a gain on customers who switched to Firm 2’s product. If these relative gains are higher than the relative losses from a price increase on Firm 1’s product, the merged entity may find it profitable and thus have the incentive to unilaterally increase the price of Firm 1’s product post-transaction. GUPPIs score such incentives, as they are the ratio between the gains and losses registered by the merged entity from a unilateral price increase in one of the merging parties’ products post-transaction. The larger this ratio is, the greater the potential incentive for the merged entity to increase the price of its products.
Multi-Sided Platforms and Upward Pricing Pressure
Multi-sided platforms are nowadays ubiquitous in a wide range of industries—from social media to streaming services to credit-card payment systems to ride-hailing services. The defining feature of multi-sided platforms is that a platform operator serves two (or more) distinct sets of consumers, which gives rise to complex network effects. One example of this is an interactive streaming platform that serves both viewers and content providers (and possibly also transacts with advertisers). Users on such platforms tend to appreciate the presence of a large number of other users. This is an illustration of direct network effects: value is derived directly from the number of other users on the same side of the platform. In addition, viewers’ demand for the platform’s services depends on the quantity and quality of media content, while content providers’ willingness to engage in business with the platform also depends on how many subscribers the content is expected to reach. This highlights the importance of indirect network effects: on each side of the platform market, participants value the number of users on the other side of the platform. Given these network effects, the analysis of pricing pressure that may result from horizontal mergers of multi-sided platforms is complicated by the fact that, in the presence of network effects, a change in any one price on any side of the market generically brings about a whole universe of changes across all sides of the platforms, both within and between the merging platforms.
Academic economists have dedicated substantial efforts to gaining a deeper understanding of multi-sided platform markets, pioneered by the seminal articles of Jean-Charles Rochet and Economics Nobel Prize laureate Jean Tirole. From the perspective of competition-policy enforcement, the 2023 Merger Guidelines list a variety of novel conduct through which platforms could potentially restrain competition both between and within platforms. The focus of this article is on the question of incentives to raise prices subsequent to a horizontal merger of two multi-sided platforms.
A pivotal step toward expanding the frontier of research into the measurement of unilateral incentives to increase prices post-merger in two-sided platform markets has been made by Pauline Affeldt, Lapo Filistrucchi, and Tobias J. Klein, as well as by Andreea Cosnita-Langlais, Bjørn Olav Johansen, and Lars Sørgard. These economists extend to two-sided markets the GUPPI approach initially developed for scoring pricing incentives of firms facing one-sided pricing problems. These two-sided GUPPIs score two-sided business operators’ incentives to increase post-merger prices on one side of their business, by taking into account the combined amount of gains and losses across the two sides of the business that would result from a price-increasing strategy by the post-merger entity.
The presence of network effects complicates this gain–loss analysis. More precisely, an increase in the price on one side of the business would divert some of its customers to the same side of the other platform within the merged entity. The gain–loss analysis of this effect is conceptually identical to the logic behind one-sided GUPPIs discussed above: the platform that raised its price would register a loss on customers who are diverted to competitors, but this loss would be partially mitigated by a gain on customers who switched to the product on the same side of the other merging platform. At the same time, the presence of indirect network effects implies that participants on a platform value the number of users on the opposite side of the same platform. Therefore, the aforementioned diversion of customers caused by a price increase may also divert away some of the participants on the other side of the merging platform that recorded the initial price increase.
Such diversion of customers from the other side of the platform would result in additional losses to the merged entity—losses that would not result from a price-increasing strategy in the context of horizontal mergers of one-sided businesses. Some of those diverted participants on the other side of the platform recording the initial price increase, however, would switch to the product on the analogous side of the other merging platform. Accordingly, the merged entity would register a gain on participants who switched to the product on the other side of the other merging platform.
To illustrate the complexities associated with measuring GUPPIs in the context of two-sided platforms, consider a hypothetical example with two print newspapers, Newspaper A and Newspaper B. The traditional print-newspaper industry can be conceived of as a platform market, with readers on one side and advertisers on the other. Readers’ demand for a newspaper generally depends on the paper’s advertisement content (i.e., if readers find the ads informative in addition to other content of the paper, they likely have higher demand for the paper; however, if they dislike ads, more ads in the paper can reduce readers’ demand for the newspaper). However, advertisers’ demand for the newspaper’s ads services depends on how many readers their ads reach. Suppose that Newspaper A and Newspaper B undergo a horizontal merger and the two newspapers are now under a common management. Given that the merging entities are two-sided businesses characterized by direct and indirect network effects, if the merged entity were to raise the price of advertising in Newspaper A, the potential effects of such a price increase would be fourfold:
(i) First, for a higher ads price charged by Newspaper A, its advertisers would directly reduce demand for the ads services offered by Newspaper A.
(ii) Second, the resulting lower number of ads would affect (either positively or negatively, depending on whether readers like the ads) the number of readers Newspaper A can attract.
(iii) Third, some of the advertisers unsatisfied with the higher price charged by Newspaper A would switch to and publish their ads in Newspaper B instead.
(iv) Finally, a higher number of ads in Newspaper B would affect (either positively or negatively, depending on whether readers like the ads) the number of readers Newspaper B can attract.
It is challenging to capture all these four effects of the increase in a single price on the ads side of the business and the combined total gains and losses implied by these for the merged entity.
Affeldt et al. (2013) laid out a rigorous conceptual framework that allowed for the quantification by a single index of all the four channels through which customer diversion may occur. In the spirit of the GUPPI for one-sided markets, this index is based on the assumption that when the price of a product on one side of the business of the merging entities is changing, all other prices on both sides of the merging firms’ businesses remain constant. However, in reality, in response to a price change on one side of a merging platform, prices on the other side of the platform as well as prices on both sides of the other merging platform will change.
Cosnita-Langlais et al. (2021) point this out and propose a set of more accurate GUPPIs for two-sided markets that takes into account the possibility that an increase in price on one side of the market subsequent to a two-sided platform merger may result in a simultaneous change in the price on the other side of the same platform that recorded the initial price increase. They argue that this is a within-platform rebalancing effect in the two-sided GUPPIs, which the index proposed by Affeldt et al. (2013) does not account for. Thus, by taking this rebalancing effect into account, the GUPPIs proposed by Cosnita-Langlais et al. (2021) are suitable for capturing one additional effect beyond those accounted for by the index proposed by Affeldt et al. (2013).
To illustrate this, consider again the hypothetical newspaper example from above, and suppose that readers derive value from ads and thus the indirect network effect is positive. If Newspaper A raised the price of its ads services after the merger with Newspaper B, then the demand for those services would fall and so would readers’ demand for Newspaper A. The merged entity would now have a potential incentive to lower the price it charges Newspaper A’s readers. This is because a lower price on the reader side would attract more readers. This, in turn, would attract more advertisers even at the higher price of Newspaper A’s ads services, given that advertisers positively value readership due to the indirect network effect. The presence of more advertisers coupled with the higher price of ads services translates to enhanced profits on the ads side of the platform.
The within-platform rebalancing effect identified by Cosnita-Langlais et al. (2021) is a significant step toward the construction of more robust two-sided GUPPIs. However, in addition to the within-platform rebalancing effects accounted for by Cosnita-Langlais et al. (2021), there may be additional price changes in the context of two-sided platform mergers that none of the existing GUPPIs encapsulate, such as changes in the prices on either side of the other merging platform when an increase in the price on one side of one of the merging platforms is contemplated as part of a price-increasing strategy. Thus, a fuller understanding of all the potential effects of the increase in a single price following a multi-sided platform merger will require more work and broader approaches.
Conclusions
This article reviews the economics literature on GUPPIs developed for scoring incentives to unilaterally increase prices after a merger of multi-sided platforms. It highlights that such GUPPIs must account not only for a diversion of customers between the merging platforms but also for a diversion of customers on both sides of each of the merging platforms. Since multi-sided platforms are characterized by direct and indirect network effects, the diversion of customers on each side of each of the merging platforms in response to a price increase on one side of one of the merging platforms is an inherent feature of multi-sided platform mergers. The article highlights that capturing such complicated patterns of diversion is a challenging task and summarizes the advancements the economics literature has made in this regard. It concludes that more comprehensive approaches will be required to further broaden the understanding of all the potential channels through which incentives for unilateral price increase may arise in the context of multi-sided platform mergers.
