On Welfare Effects of Horizontal Mergers with Product Differentiation

Marc Escrihuela Villar

doi:10.46631/jefas.2011.v16n30.01

Abstract

We use a non-spatial (Chamberlinian) product differentiation model to analyze the welfare effects of horizontal mergers with quantity competition. We argue that (i) mergers can be welfare enhancing if the degree of product differentiation increases after the merger; and, (ii) privately profitable mergers can also increase welfare. Consequently, in this paper we demonstrate that the degree of product differentiation is a crucial factor to assess the welfare effects of a merger.

Highlights

Traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products
We show that any merger might be welfare enhancing if the degree of product differentiation increases after the merger
We prove that in absence of cost synergies derived from the merger, a privately profitable merger involves a number of participants such that this merger only reduces welfare when the post-merger value of the product differentiation does not increase sufficiently

Summary

Introduction

Traditional merger analysis is difficult to implement when evaluating mergers in industries with differentiated products. “Coordinated effects” arise if the merger would make collusion between the merged firm and its rivals more likely, or make their behavior more accommodating. “Unilateral effects” arise if the merger would give the merged entity a unilateral incentive to harm consumers. “Unilateral effects” arise if the merger would give the merged entity a unilateral incentive to harm consumers1 This approach, does not always work well in the large class of mergers in which the merging firms sell differentiated products and the agencies must weigh concerns about unilateral effects. There is a common perception that the degree of product differentiation is a crucial determinant of the welfare effects of horizontal mergers

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