The Price and Profit Effects of Horizontal Merger: A Case Study

Abstract

THE economic rationale behind antitrust concern for horizontal mergers rests primarily on the familiar structure-performance paradigm that links market concentration with supra-competitive profits and, implicitly, with higher prices. A vast empirical literature has demonstrated a positive statistical relationship between measures of industry structure, such as entry barriers and concentration, and average industry profit using cross section data. A small number of cross section studies, most dealing with banking services, have claimed to find a positive relationship between concentrated market structure and price measures (Aspinwall [1970], Bell and Murphy [I969], Heggestak and Mingo [1976], Hester [I979], Lamm [I98I], Landon [I97I], Marion et al. [1979] and Marvel [1978]), but we are unaware of any study that traces the effect of an actual change in market structure on prices or profits. In this paper we exploit an unusual opportunity to test for price effects and estimate profit consequences of two acquisitions that resulted in substantial increases in the market share of the acquiring firm. The evidence we examine arises from a recent Federal Trade Commission antitrust suit against Xidex corporation, the world's largest producer of duplicating microfilm. The Xidex case is unusual in three respects. (I) Although the size of the market is small (sales under $ioo million), the acquisitions involved greater changes in market shares than are usual in antitrust actions. (2) The suit was brought five years after the first acquisition and two years after the second; so a post-acquisition record of price behavior exists for this example. Furthermore, the price data used in this study are actual transaction prices. (3) Special characteristics of the products allow a relatively straightforward test for price effects of the acquisitions. The next section provides background information concerning the firms and products involved. Following that, we describe the data and methodology used to estimate the price effects of the acquisitions, and present results which indicate significant price increases traceable to the acquisitions. We then offer estimates of the incremental profits attributable to those price increases. A final section provides a summary. * The analysis and conclusions set forth in this study are those of the authors and do not necessarily reflect the views of Federal Trade Commission Staff or the Commission itself. All data and other information used in the study are in the public domain This includes information obtained by the Commission which has become part of the public record. For helpful comments we thank Allan Fisher, Ron Lafferty, Paul Pautler and Rich Sciacca of the Bureau of Economics, Federal Trade Commission.