Upward pricing pressure in horizontal mergers with fuzzy capacity constraints

Unlike strict capacity limits, fuzzy constraints allow firms to accept a portion of customers beyond a baseline capacity, which generates rejected customers and creates complex dynamics in pricing and customer diversion.

Núñez derives a new upward pricing pressure (UPP) formula tailored to these conditions, revealing three key channels through which capacity constraints shape post-merger prices:

• Reduced diversion between merging firms, mitigating price increases.
• Enhanced diversion from rejected customers of non-merging firms, amplifying price effects.
• Feedback effects that further influence pricing incentives.

The model demonstrates that capacity constraints can either mitigate or amplify post-merger price increases depending on where they fall. This highlights implications for regulators, economists, and practitioners evaluating competitive effects in capacity-limited industries.

This research bridges a gap in merger theory and offers practical insights for antitrust analysis and pricing strategies in markets with uncertain or localized capacity limits. Read the full paper to learn more about the model and its implications.