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Should Competition Agencies Focus on ‘Value Added’ Instead of Final Prices?

Competition investigations frequently consider whether a firm or collection of firms have incentives to raise prices. Some competition authorities propose that it may sometimes be appropriate to consider the incentive to increase a measure of value added rather than final prices per se. This article addresses the question whether this development in practice is desirable and consistent with the efficient administration of competition law and, more generally, good economic policy. To consider the topic we review the debate surrounding the introduction of a value-added SSNIP into the 2010 US Horizontal Merger Guidelines and we add to the debate by comparing the properties of the value-added test compared to traditional price-increase thresholds. We also describe the potentially important role of vertical integration in determining outcomes under a value-added test. We conclude that a value-added approach may add confusion and complexity to competition analysis, without adding much value. Instead, competition agencies should focus their efforts on considering whether a given price rise indicates a material restriction or distortion of competition.