December 2, 2008
Efficiency Gains and Mergers
Posted by D. Daniel Sokol
ABSTRACT: In the theoretical literature, strong arguments have been provided in support of the efficiency defense in antitrust merger policy. One of the most often cited results is due to Williamson (1968) that shows how relatively small reduction in cost could offset the deadweight loss of a large price increase. Furthermore, Salant et al. (1983) demonstrate that (not for monopoly) mergers are unprofitable absent efficiency gains. The general result, drawn in a Cournot framework by Farrell and Shapiro (1990), is that (not too large) mergers that are profitable are always welfare improving. In the present work we challenge the conclusions of this literature in two aspects. First, we show that Williamson's results underestimate the welfare loss due to a price increase and overestimate the effect of efficiency gains. Then, we prove that the conditions for welfare improving mergers defined by Farrell and Shapiro (1990) hold true only when consumers are adversely affected. This seems an argument to disregard their policy prescriptions when antitrust authorities are more "consumers-oriented". In this respect, we provide a necessary and sufficient condition for a consumer surplus improving merger: in a two firm merger, efficiency gains must be larger than the pre-merger average markup.
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I'd really like to become an expert on EU competition law. I am a US citizen with a JD. Is getting an LLM in this area, in Europe, a good way to find employment in Europe and perhaps lateral back to a firm/govt job in the US a few years from now?
This is a question to anyone, not just the author of this post.
I also know that this question is quite random, but I'm posting in a few places in hopes of getting some sort of advice. Thanks!
Posted by: BWilliams | Dec 2, 2008 11:31:53 AM