Monday, November 16, 2009
Posted by D. Daniel Sokol
ABSTRACT: The purpose of this article is to investigate the optimal merger policy in the presence of deterrence as of well as of type I and type II errors. We consider the optimal number of merger investigations, both when the competition authorities commit to a particular activity level and when they do not commit. If they commit, it is shown that the low quality of final decisions may lead to the deterrence of mergers that would have been welfare improving. On the other hand, when potential mergers with the largest negative impact on welfare are deterred, we find that the merger investigations themselves might have a negative impact on welfare (enforcement effect). It is shown that the absence of commitment can lead to a less active merger policy and lower welfare than what is the case if the authority did commit to a certain level of activity. The results have important implications for how one should interpret the empirical studies of the effects of merger enforcement.