On the welfare effects of mergers: Short run vs. long run

Abstract

We use a two-period model to analyze the short run and long run profitability and welfare consequences of horizontal mergers, where the equilibrium responses to a merger can differ over time. Although firms can anticipate the merger, they can only adjust their capacity in the long run. We find a greater range of profitable mergers than in static models. For a merger to raise welfare, it is sufficient that the short run welfare effects are positive and necessary that the long run effects are positive. We relate these conditions to the inside firms' market shares and the Herfindahl index.