Dynamic Merger Policy and Pre-Merger Investment: Equilibrium Product Choice by an Entrant

36 Pages Posted: 2 Mar 2021 Last revised: 16 Nov 2021

See all articles by Richard Gilbert

Richard Gilbert

University of California, Berkeley

Michael L. Katz

University of California, Berkeley - Department of Economics; Haas School of Business

Date Written: October 12, 2021

Abstract

We examine the effects of merger and merger policy on a potential entrant’s pre-merger product choice. We establish conditions under which the possibility of merger can induce an entrant to inefficiently imitate an incumbent’s product instead of innovating with a more differentiated product. Turning to policy, current practice is to evaluate a proposed merger by focusing on post-merger effects (e.g., whether the merged firm will charge higher prices or invest less in innovation than would the two firms if they remained independent of one another). We show that policies focused solely on a proposed merger’s ex post welfare effects can induce an entrant to choose an inefficient direction for its pre-merger investment decisions. We also show that, taking into account merger policy’s effects on pre-merger product choice, it can be optimal to approve mergers with a positive probability even when the post-merger welfare effects of every consummated merger are negative.

Keywords: Antitrust, Entry, Innovation, Merger Policy, Product Differentiation

JEL Classification: K21, L13, L4

Suggested Citation

Gilbert, Richard and Katz, Michael L., Dynamic Merger Policy and Pre-Merger Investment: Equilibrium Product Choice by an Entrant (October 12, 2021). Available at SSRN: https://ssrn.com/abstract=3795782 or http://dx.doi.org/10.2139/ssrn.3795782

Richard Gilbert

University of California, Berkeley ( email )

Department of Economics
530 Evans Hall #3880
Berkeley, CA 94720
United States
510 642 1507 (Phone)

Michael L. Katz (Contact Author)

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

Haas School of Business ( email )

Berkeley, CA 94720
United States

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