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Does the Potential to Merge Reduce Competition?

Dirk Hackbarth and Bart Taub

No 12732, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study anti-competitive mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge, which trades off benefits of avoiding price wars against the costs of merging. There are three results. First, mergers are optimal when collusion fails (i.e., firms sufficiently deviate from a collusive regime). Second, long periods of collusion are likely, because colluding is dynamically stable. Therefore, mergers are rare. Third, mergers (and, in particular, lower merger costs) decrease pre-merger collusion, as punishments by price wars are weakened. Thus, although anti-competitive mergers harm competition ex-post, barriers and costs of merging due to regulation should be reduced to promote competition ex-ante.

Keywords: Competition; Horizontal mergers; imperfect information; Industry Structure; market power (search for similar items in EconPapers)
JEL-codes: D43 G34 L12 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-gth, nep-ind and nep-mic
Date: 2018-02
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