Anticompetitive Effects of Horizontal Acquisitions: The Impact of Within-Industry Product Similarity

Abstract

Theory predicts that in concentrated industries with high product similarity, horizontal acquisitions can effectively increase incumbent firms’ market power. Using a novel measure for industry product similarity, we show that in such industries firms’ propensity to make horizontal acquisitions is greater and that the acquisitions result in more positive announcement returns for the acquirer and rival firms and in a larger premium paid for the target. Also, the deals lead to higher industry prices, supplier and customer stock prices react negatively to them, and they are more likely to be challenged by antitrust authorities. Further, the impact of industry product similarity on deal announcement returns and outcomes is increasing in the extent to which firms in dependent customer industries are reliant on the output of the industry where the deal occurs. Overall, by emphasizing the importance of product similarity, our results help explain mixed results on whether horizontal acquisitions are used to reduce competition intensity.