Horizontal Mergers

WHEN TWO COMPETITORS MERGE

WHAT ABOUT IDENTICAL FIRMS IN COURNOT?

The merges increases prices and outsiders’ profits. This is the exception - usually firms benefit from merging (unless they are identical + competing a la Cournot)

WHAT ABOUT NON-IDENTICAL FIRMS IN COURNOT?

The merger always benefits the merged firms (more efficient).

When does a horizontal merge increase outsiders’ profits?

The merge increases the outsiders’ profits if the efficiency gains for the insiders are relatively small

When is a horizontal merge beneficial for consumers?

If the merger generates sufficient efficiency gains?

How to calculate consumer surplus?

???

Horizontal Mergers + Collusion

Horizontal mergers might create structural conditions for firms to collude:

1) Reduced number of firms

2) More symmetric distribution of assets

Horizontal Mergers + Innovation

Two opposing forces:

1) Creates a negative externality to competitors - negative effect on the merge entity’s incentive to innovate

2) Relaxed competition both when firms innovate or don’t - might increase R&D incentives

• Net effect negative