In many industries, competition occurs between firms that are capacity constrained; production depends on resources that are slow or increasingly costly to expand.
Examples include hospitals with a fixed number of beds, and hotels with a fixed number of rooms.
In the article “Unilateral Price Effects in Horizontal Mergers with Capacity Constraints,” published in CPI’s Antitrust Chronicle, CRA’s Ignacio Núñez explores how capacity constraints affect upward pricing pressure (UPP) in horizontal mergers and offers a practitioner’s guide to identifying and modeling constraints.
Key points addressed in the article are:
- Capacity constraints can mitigate UPP when they bind for merging firms, and can increase UPP when they bind for non-merging rivals.
- Capacity constraints may arise for different reasons, such as when firms reach maximum production limits, or when firms have unlimited capacity but also increasing marginal costs of production.
- Economists may use different models to represent capacity constraints, which often have different data requirements and lead to different predicted price effects.
This article builds on the author’s related working paper, which explores modeling frameworks to account for capacity constraints in more detail, and a recent paper published in Economics Letters that evaluates UPP under “fuzzy” (soft) capacity constraints.
Together, these pieces show that accounting for capacity constraints can materially change conclusions about post‑merger unilateral pricing incentives.