Horizontal mergers in low carbon manufacturing

Abstract

Motivated by the horizontal mergers that have recently become prevalent in low carbon economy, this paper studies the impact of mergers between low carbon manufacturers on prices and carbon emissions. We analyze a game-theoretical model taking into account price and emission sensitive demand in the absence and presence of cap-and-trade policy, respectively. In addition to price collusion and production cost savings, we find that carbon emission collusion and green technology investment cost synergies of mergers between low carbon manufacturers have several price and emission implications that have not been addressed by previous research. While a merger reduces competition, our result shows that the merging manufacturers could charge lower prices but increase carbon emissions even in the absence of the two sources of cost savings. We further establish that production cost synergies (green technology investment cost savings) can (cannot) alone lead to a win-win-win outcome in which merging manufacturers enjoy higher profits, consumers benefit from more environmental-friendly products with reduced prices, and environment becomes better off due to reduced carbon emissions in the absence of green technology investment cost savings (production cost savings). Moreover, if the green technology investment cost synergies are relatively small but the production cost savings are not too small, the win-win-win outcome can be achieved. Finally, we show that the cap-and-trade regulation is an efficient policy for antitrust agencies to further protect the consumers and environment.