Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Wednesday, July 14, 2010

Going Beyond the Conventional Wisdom on Whether Merger-Related Cost Savings Will Benefit Customers

Posted by D. Daniel Sokol

Michael Baye (IU Bloomington - Kelley School of Business) and Graeme Hunter (NERA) discuss Going Beyond the Conventional Wisdom on Whether Merger-Related Cost Savings Will Benefit Customers.

ABSTRACT: The motivation for many proposed mergers and acquisitions is the potential to reduce operating costs or to improve product quality, customer service, or the rate of innovation. Although the prospect of efficiencies may explain why the merging parties want to merge, what determines whether consumers are likely to benefit as well? This paper examines the conventional wisdom that reductions in marginal costs will be passed through to consumers in the form of lower prices. They explain how and why a given reduction in marginal cost may or may not lead to a drop in price. The market factors that may determine the outcome include the nature of consumer demand and the dynamics of competition in the market served by the merged firm.

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