Does the potential to merge reduce competition?

Hackbarth, D. and Taub, B. (2022) Does the potential to merge reduce competition? Management Science, 68(7), pp. 5364-5383. (doi: 10.1287/mnsc.2021.4089)

Abstract

We study anti-competitive horizontal mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge to form a monopoly, trading off the benefits of avoiding price wars against the costs of merging. The potential to merge decreases pre-merger collusion, as punishments effected by price wars are weakened. We thus extend the result of Davidson and Deneckere (1984), who analyzed the weakening of punishments post-merger, demonstrating that pre-merger collusion is weakened, in a fully stochastic model. Thus, although anti-competitive mergers harm competition ex-post, the implication is that barriers and costs of merging due to regulation should be reduced to promote competition ex-ante.

• Item Type: Articles
• Additional Information: This research was carried out in part during Bart Taub’s stay at ICEF, Higher School of Economics, Moscow, and also at the European University Institute, Florence. He gratefully acknowledges financial support from the Academic Excellence Project 5-100 of the Russian Government and from the Fernand Braudel Fellowship at the European University Institute.
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Taub, Professor Bart
• Authors: Hackbarth, D., and Taub, B.
• Subjects: H Social Sciences > HB Economic Theory; H Social Sciences > HG Finance
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Management Science
• Publisher: INFORMS
• ISSN: 0025-1909
• ISSN (Online): 1526-5501
• Published Online: 28 October 2021
• Copyright Holders: Copyright © 2021 INFORMS
• First Published: First published in Management Science 68(7): 5364-5383
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher