Antitrust & Competition Policy Blog

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

Friday, August 10, 2018

Does the Potential to Merge Reduce Competition?

Hackbarth, Dirk and Taub, Bart ask Does the Potential to Merge Reduce Competition?

ABSTRACT: We study anti-competitive mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge, which trades off benefits of avoiding price wars against the costs of merging. There are three results. First, mergers are optimal when collusion fails (i.e., firms sufficiently deviate from a collusive regime). Second, long periods of collusion are likely, because colluding is dynamically stable. Therefore, mergers are rare. Third, mergers (and, in particular, lower merger costs) decrease pre-merger collusion, as punishments by price wars are weakened. Thus, although anti-competitive mergers harm competition ex-post, barriers and costs of merging due to regulation should be reduced to promote competition ex-ante.

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