Horizontal Mergers, Prices, and Productivity

Abstract

We use data from the Census of Manufactures (CM) for the ready-mix concrete industry over the period from 1977 to 1992 to study horizontal mergers. Despite being associated with substantial productivity increases, horizontal mergers are also associated with significant price increases at acquired plants. We then make use of the rich data available through the CM and the particular characteristics of the ready-mix concrete industry to undertake a thorough examination of whether the observed price increases are the result of increases in market power. Notably, we find that the price increases resulting from horizontal mergers are restricted to acquisitions occurring after the promulgation of the 1982 Merger Guidelines, which when interpreted in the context of a number of additional analyses, suggests that the price increases are associated with enhanced market power. Based on this finding, we use our results to address conflicting predictions from the theoretical literature considering the interaction between the market power effects and productivity effects of horizontal mergers. Finally, we show that these market power effects cause the revenue based measure of productivity TFPR to significantly overestimate the productivity increasing effects of horizontal mergers at acquired plants and relate these conclusions to results on acquisition dynamics from the firm dynamics literature.