Horizontal mergers in declining industries: Theory and evidence

Abstract

In a declining industry, horizontal merger may allow firms to retire older capacity and to match state-of-the-art capacity. At high levels of market demand, mergers may be privately profitable but socially undesirable and should be prohibited. Here, rationalization of capacity to achieve matching economies is not a sufficient argument to support merger since, at high demand levels, efficiency is gained only at the expense of output suppression. On the other hand, once industry demand has declined to low levels relative to per-firm capacity, privately profitable mergers are socially desirable. Examples of horizontal mergers in declining industries illustrate the general implications of the model.