Mergers in durable-goods industries: A re-examination of market power and welfare effects

Abstract

An important question from the standpoint of antitrust economics is, how do mergers in durable-goods industries differ from those in nondurable-goods industries from the perspective of welfare effects? Previous papers that have considered this issue employ an approach to modeling durable-goods markets that was popularized by Swan in the early 1970s in which new and used “service units” are perfect substitutes in consumption. We employ a modeling approach similar to those employed in later contributions by Anderson and Ginsburgh (1994), Waldman (1996a), and Hendel and Lizzeri (1999) which, more realistically, do not make the perfect substitutability assumption. Our analysis confirms the main result of the earlier literature which is that a competitively supplied stock of used units typically reduces the welfare loss associated with a durable-goods merger. However, we also show that in most cases this reduction is much smaller than found in Carlton and Gertner׳s (1989) classic analysis of the topic. The implication is that the antitrust authorities should be more concerned about mergers in durable-goods industries than the previous literature suggests.