L13: Horizontal Mergers

Question 1

relevant questions around horizontal mergers

Answer 1

what motivates firms in an industry to merge?

how can we evaluate the effect of mergers?

what stance should regulators take towards mergers?

Question 2

why merge?

Answer 2

relax competition
- increase price and therefore profits

strategic benefits
- bargaining power in input markets

cost efficiencies
- bringing together better management practices
- taking advantage of scale economies

don’t know which effect dominates, but the first is bad for consumers

Question 3

mergers and differentiation

Answer 3

with differentiation, every firm is a monopolist to consumers that are close to them in the characteristic space

if merging firms are substitutes, we would be concerned
- constrains competition especially if they are close substitutes

Question 4

arguments in favour of mergers

Answer 4

sufficient competition that mergers cannot increase prices

enhances efficiency, leading to lower prices or higher quality

Question 5

retrospective merger evaluation (Ashenfelter and Hosken, 2009)

Answer 5

looking at mergers that happened after being reviewed where the HHI > 2500 or ∆HHI > 200

identified close calls like Pennzoil’s purchase of Quaker State
- merger represented 2 of 5 major brands of premium motor oil
- synthetic and generic motor oils as substitutes so merger was approved
- prices did increase but not in a crazy way and shift in market share from Quaker State to Pennzoil

analysis describes what happens after a merger which is informative but hard to label as causal

Question 6

upward pricing pressure test - Farrell and Shapiro, 2009

Answer 6

prospective merger evaluation

seeing if the merger creates higher or lower prices depending on the tradeoff of demand side elasticities and efficiency costs