Does the Potential to Merge Reduce Competition?
55 Pages Posted: 8 Mar 2012 Last revised: 19 Nov 2017
Date Written: November 9, 2017
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.
Keywords: Competition, imperfect information, industry structure, market power, mergers
JEL Classification: D43, L12, L13, G34
Suggested Citation: Suggested Citation