Wednesday, May 31, 2017

Do Merger Efficiencies Always Mitigate Price Increases?

Zhiqi Chen (Department of Economics, Carleton University) and Gang Li (School of Economics, Nanjing University) ask Do Merger Efficiencies Always Mitigate Price Increases?

ABSTRACT: In a Cournot model with differentiated products, we demonstrate that merger efficiencies in the form of lower marginal costs for the merging firms (the insiders) lead to higher post- merger prices under certain conditions. Specifically, when the degree of substitutability is low between the products offered by the two insiders but high between those by an insider and an outsider, increased merger efficiencies may exert upward rather than downward pressure on the prices of the merging firms. Our results suggest that in cases where firms engage in quantity competition, antitrust authorities should not presume that merger efficiencies will necessarily mitigate the anticompetitive effects of the merger. Prices can go up because of large efficiencies.

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