Abstract
This paper studies five mergers in the European wireless telecommunication industry and analyzes their impact on prices and capital expenditures of both merging carriers and their rivals. We find substantial heterogeneity in the relationship between increases in concentration and carriers’ prices. The specifics of each merger case clearly matter. Moreover, we find a positive correlation between the price and the investment effect; when the prices after a merger increase (decrease), the investments increase (decrease) too. Thus, we document a trade-off between static and dynamic efficiency of mergers.
Highlights
Market structure has an important effect on the static and dynamic efficiency of markets
We choose a multiple-single-case approach: We study five mergers in four European countries that increased market concentration considerably4 and we examine the effects of mergers on two outcomes: prices as a measure of static efficiency, which is determined by the current firm’s market power and costs; and capital expenditures as a measure of the firms’ investment incentives
If a merger reduces the competitive rivalry in a given market, both the merging parties and the rivals may respond by increasing their prices
Summary
Market structure has an important effect on the static and dynamic efficiency of markets. A standard microeconomic argument suggests that a more competitive market puts more pressure on firms to exploit ways to reduce production costs and increase efficiency. Firms will face low profits and will try to “escape competition” (Aghion et al 2005) by reducing their cost of production. The incentives to invest will affect static efficiency (in the form of lower prices), and dynamic efficiency (in the form of increased investment in long-term improvements). Mergers and acquisitions will affect market structure significantly. We study whether and how indicators of static and dynamic efficiency are affected by a merger in the industry
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