Antitrust Policy Toward Horizontal Mergers

Competition Policy and Antitrust

Article Snapshot

Author(s)

Michael Whinston

Source

Handbook of Industrial Organization Vol. 3, M. Armstrong and R. Porter, eds., Amsterdam: Elsevier, 2007

Summary

This chapter survey competition policy relating to the merger of competing firms.

Policy Relevance

Whether mergers are likely to hurt or help consumers varies.

Main Points

  • In assessing mergers, competition policy must balance harm to competition with benefits such as cost reductions that lower prices.

  • Mergers effect not only prices but also R&D, the costs of production, production capacity, quality, and decisions about new products. Some leading theories do not take this complexity into account.

  • In asking if a merger will help consumers by lowering prices, it can help to focus on how it affects production costs. Empirical studies of telephone equipment and oil production show that these can vary widely between firms.

  • Theories about mergers can be “static,”  judging the effect of the merger just by looking at its immediate effect, or “dynamic,” looking at the long run effect of the merger.

  • Merger law worldwide became more like the law in the United States. U.S. authorities ask what the market is, how many firms serve the market, and how the merger could help consumers, and other factors. About 2% of mergers are blocked in the United States, about 7% in the European Union.

  • Merger simulations might help solve problems with predicting how a merger will affect prices, but this can be hard because one must know how consumers and other firms will respond to the merger.  Looking at the stock market reaction to mergers might help predict whether a merger will help or harm consumers.

  • Empirical studies show that some mergers raise prices and others reduce them. Substantial mergers are more likely to raise them.

  • Studies of whether mergers affect production cost or other efficiencies show that some are helpful and some are harmful. Many questions remain about the effect of mergers.

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