The Effects of Merger Synergies on Consumers of Differentiated Products

Abstract

Defending a challenged merger on the basis of synergies requires an analysis of the likely pass through to consumers of associated marginal cost reductions. This paper explores the nature and extent of that pass though with differentiated consumer products. Pass-through rates are shown to depend on demand curvature and idiosyncratic properties of particular demand functions. The marginal cost reductions necessary to fully compensate for the price-increasing effects of a merger, however, do not depend on these things. This implies a close relationship between pass-through rates and the price effects of mergers absent synergies and indicates that pass through should not be addressed as a discrete issue in merger cases. Finally, the paper examines ways in which the degree of competition can affect the three pass through effects; contrary to persistent contentions, greater competition easily may result in less pass through.