Post-merger Price Research Articles

Seeking efficiency or price gouging? Evidence from pharmaceutical mergers

We examine the impact of mergers on drug prices and document significant differences between the post-merger pricing strategies of highly innovative pharmaceutical firms and other firms. While the former raise prices of overlapping drugs, especially brand name drugs that tend to be first-in-class and patented, we find pervasive evidence of price reductions by generic manufacturers. Our evidence suggests that the price reductions are due to cost cuts realized by less innovative firms in overlapping product spaces. We also show that less innovative acquirers cut R&D and shift product development from high-novelty products to cheaper, less-risky products.

Price Effects of Horizontal Mergers: A Retrospective on Retrospectives

Abstract This comprehensive review of ex post merger studies assesses the price effects of horizontal transactions to determine whether there are common post-merger price effects, both overall and in specific markets. The aim is to derive implications for policy makers and competition authorities in terms of effective merger enforcement and competition policy. By combining and further analysing the results of 52 retrospective studies on 82 mergers or horizontal transactions, it can be shown that the sector in which the respective transaction takes place alone is not a strong indicator of the direction of price-related merger effects. In contrast, the ‘size’ or ‘importance’ of a transaction as well as market concentration seem to be correlated with post-transaction price increases, especially in already highly concentrated markets. Overall, this meta-study shows the importance of ex post case studies for improving ex ante merger control: although generalizations can only be made with caution, the subsequent analysis of a case and its ex post observable outcome can provide useful information for future merger enforcement in general, either in the same industry and/or with similar case characteristics, as well as for competition policy regulators.

Horizontal mergers with Bertrand competition and convex costs

We discuss horizontal mergers in a homogeneous good industry where firms compete à la Bertrand with increasing marginal production costs. We show that profitable mergers can occur even for lower post-merger prices with respect to the pre-merger scenario, thus implying an increase in consumer surplus. The driving force of the result is the ability of the merged entity cutting production costs by sharing the output among its plants. This output rationalization effect can compensate for the revenue loss due to the merged entity producing less than the cumulated pre-merger production of the merging parties.

When post-merger price effect becomes smoothed over time: A case of a gasoline market merger

This paper provides empirical evidence using a difference-in-difference estimation strategy for the post-merger price effect caused by the acquisition of two branded chains for gasoline retail. On the one hand, mark-ups of the Hungarian retail gasoline market increased significantly after the takeover contract came into force. On the other hand, an additional price increase occurred after all of the acquired stations had offered the same services as the acquiring firm, even though implementing these changes might require a year after the takeover contract came into force. This suggests that further price effects may occur when the merger procedure requires a longer period. Moreover, the additional price increase suggests that examining product differentiation on the market is necessary to evaluate merger effects.

Merger simulation based on survey–generated diversion ratios

ABSTRACT This research modifies the well-known three-stage merger simulation procedure of Nevo by replacing demand analysis in the first stage with survey-generated diversion ratios and own-price elasticities. We also provide a post-merger price formula under the scenario of two firms competing in the same relevant market and operating independently of the other firms in the relevant market. The same scenario is considered in upward pricing pressure (UPP) and is commonly observed in most filing cases for mergers. Since the formula is exact and requires only data on each firm's price and own-price elasticity and the diversion ratios between these two firms, our approach's implementation cost is almost identical to that used in the critical loss analysis, the diversion ratio, and UPP. The formula thus is informative and convenient for competition enforcement when dealing with merger cases.

Competitive Harm from Vertical Mergers

The antitrust enforcement Agencies’ 2020 Vertical Merger Guidelines (VMGs) introduce a nontechnical application of bargaining theory into the competitive assessment of vertical acquisitions. This bargaining theory has much in common with the theory of unilateral effects that is applied to horizontal mergers. The VMGs focus on post-merger price increases requires consideration of a vertical merger’s role in eliminating double marginalization (EDM). The problem occurs when two bargaining firms both have market power but are unable to coordinate their output. Assessing EDM bundles two themes that Ronald Coase developed in his two most well-known articles: “The Nature of the Firm” and “The Problem of Social Cost”. The first argued that the boundaries of a firm are determined by the firm’s continuous search to minimize costs. The second argued that two traders in a well-functioning market will achieve the joint-maximizing solution. Anti-interventionists rely heavily on Coasean arguments that unless high transaction costs get in the way firms will bargain to joint maximizing results. If that is true, then double marginalization will rarely provide a defense to a vertical merger. The law of vertical mergers deals largely with firms that transact with one another routinely, in legally enforceable buy-sell relationships. In a well-functioning vertical market durable double marginalization should be rare.

Merger-Simulation based on Survey–Generated Diversion Ratios

This research modifies the well-known three-stage merger simulation procedure of Nevo (2000) by replacing demand analysis in the first stage with survey-generated diversion ratios and own-price elasticities. We also provide a post-merger price formula under the scenario of two firms competing in the same relevant market and operating independently of the other firms in the relevant market. The same scenario is considered in upward pricing pressure (UPP) and commonly observed in most filing cases for mergers, where the competition enforcers can only have access to these two firms’ data most of the time. Since the formula is exact and requires only data on price and own-price elasticity of each firm and the diversion ratios between these two firms, our approach’s implementation cost is almost identical to that used in critical loss analysis, the diversion ratio, and UPP. The formula thus is informative and convenient for competition enforcement when dealing with merger cases.

Antitrust analysis with upward pricing pressure and cost efficiencies.

We investigate the accuracy of UPP as a tool in antitrust analysis when there are cost efficiencies from a horizontal merger. We include merger-specific cost efficiencies in a tractable manner in the model and extend the standard UPP formulation to account for these efficiencies. The efficacy of the new UPP formulations is analyzed using Monte Carlo simulation of 40,000 mergers (8 scenarios, 5,000 mergers in each scenario). We find that the new UPP formulations yield substantial gains in prediction of post-merger prices, and there are substantial gains in merger screening accuracy as well. Moreover, the new UPP formulations outperform the standard UPP formulation at higher thresholds for all the standard cases in the paper. The results are robust to several additional analyses. The results show that including cost efficiencies in a manner guided by the theoretical model may yield substantial improvements in accuracy of UPP as a tool in antitrust analysis.

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Price Pressure Indices, Innovation and Mergers Between Commonly Owned Firms

The potentially anticompetitive effects of common ownership are being discussed controversially. While the US agencies still display reluctance, the Commission has already invoked common ownership has part of a theory of harm in Dow/DuPont and Bayer/Monsanto. In our paper we focus on how common ownership can bear on the application of price pressure indices in unilateral effects analysis of horizontal mergers between portfolio companies. We do not assess whether the underlying premise of common ownership to lead to an internalization of shareholders’ expectations of high overall market returns is convincing. Rather, we hypothesize such common shareholder influence. Our main conclusion is that common ownership should still not be considered a general circumstantial factor indicating competitive harm with respect to post-merger price increases or effects on innovation competition. Rather, it calls for case-by-case analysis.

Post-merger Price Dynamics Matters, So Why Do Merger Retrospectives Ignore It?

The overwhelming majority of retrospective merger studies pool the post-merger data to estimate the average price effect of the merger. Pooled post-merger estimates ignore key information about price dynamics and are unable to identify if post-merger prices revert to pre-merger levels within the same time period. We provide evidence—from a meta-analysis of over 600 previous market-level price effect estimates, and a set of Monte Carlo experiments—that using pooled models often leads to erroneous conclusions: for example by wrongly concluding that the merger increased prices, even when this price increase was only temporary.

Cost Efficiencies and Upward Pricing Pressure

We investigate the accuracy of UPP as a tool in antitrust analysis when there are cost efficiencies from a horizontal merger. We include model-based, merger-specific cost efficiencies in a tractable manner and extend the standard UPP formulation to account for these efficiencies. The efficacy of the new UPP formulations is analyzed using Monte Carlo simulation of 40,000 mergers (8 scenarios, 5,000 mergers in each scenario). We find that the new UPP formulations yield substantial gains in prediction of post-merger prices, as compared to existing practice, and there are substantial gains in merger screening accuracy as well. Moreover, the new UPP formulations outperform the standard UPP formulation at higher thresholds for all the standard cases in the paper. The results support the inclusion of model-based cost efficiencies in the standard UPP formulation for more accurate antitrust decision-making.

Seeking Efficiency or Price Gouging? Evidence from Pharmaceutical Mergers

We show that pharmaceutical mergers are a response to competitive pressure. Firms whose drugs face more competition tend to become acquirers and these acquirers pursue firms whose drugs hold strong competitive positions in their product spaces. However, we find no evidence of greater post-merger price increases of merging firms’ drugs as compared to a control group. Rather, we find robust support for the efficiency perspective of mergers. Firms with a high product overlap are more likely to merge and mergers are followed by a decline in prices of drugs that are similar across the acquirer and target portfolios.

Higher Together: Price and Welfare Effects of a Merger Between Two Low Cost Carriers

This paper conducts a retrospective analysis of a unique merger between two low cost carriers: Southwest Airlines and AirTran Airways. The paper begins with a detailed study of price effects for a variety of routes affected by the merger such as overlapping markets, markets where either carrier exerted potential competition, and markets where AirTran ceased service following the merger. The significant magnitude of price increase indicates that a merger between two carriers that had an industry reputation of disciplining fares of other carriers has wide ramifications on welfare. The price analysis is followed by a structural model of airline competition that is used to quantify the impact of the merger on welfare in overlapping markets. The finding shows that following the merger, consumer welfare decreased and airlines' pro ts increased. A merger simulation exercise is also performed to assess the difference between actual post-merger prices and simulated prices. The findings show that the actual post prices are higher than that suggested by the simulation model.

Heterogeneous Merger Impacts on Competitive Outcomes

Mergers realize heterogeneous competitive effects on profits, production, and prices. To date, it is unclear whether differential merger outcomes are caused mostly by firms' technology or product market attributes. Furthermore, empirical merger studies conventionally assume that, conditional on regressors, the impact of mergers on outcomes is the same for every firm. We allow the merger responses to vary across firms, even after controlling for regressors, and apply a random-coefficient or heterogeneous treatment effect model (in the context of Angrist and Krueger (1999), Heckman, Urzua, and Vytlacil (2006), and Cerulli (2012)). Based on a comprehensive dataset on the static random access memory industry, we find that firms' postmerger output further increases (and postmerger price further declines) if merging firms are more efficient, operate in more elastic product markets, are more innovative, and acquire knowledge in technological areas that are relatively unexplored to themselves. A further interesting insight is that product market characteristics cause stronger postmerger outcome heterogeneities than do technology market characteristics. We also find that the postmerger effects accounting for heterogeneities differ greatly from those that consider homogeneous postmerger outcome effects. Our estimation results provide evidence that ignoring heterogeneous outcome effects can result in heterogeneity bias, just as ignoring premerger heterogeneities can lead to selectivity bias.

Merger Analysis with Endogenous Prices and Product Characteristics: Generalized Theorem and Application to the U.S. Airline Industry

This paper studies firms' endogenous choices of prices and product characteristics pre- and post-merger. The paper finds that firms' adjustments of post-merger prices and product characteristics depend on pre-merger market shares, net benefits of improving product characteristics (Definition 2.1), overall production efficiencies (Definition 2.2) and threshold market shares that balance marginal cost and markup effects (Definition 2.3). A generalized theorem (Theorem 3.1) is provided to characterize the conditions to predict post-merger outcomes. An application of the 2010 merger of United and Continental Airlines demonstrates that the theorem achieves high prediction accuracy in predicting post-merger outcomes.

Market Power and Mergers in Multi-Sided Markets

Due to the presence of network externalities in multi-sided markets, evaluating the performance of a platform is more difficult than for a firm in a traditional market. In this paper I develop methods for determining platform marginal costs, market power, and post-merger price predictions. I show that with positive network externalities, traditional methods will underestimate unobserved marginal costs and will overstate both platform market power and post-merger pricing predictions. I also find that if a multi-platform seller partially integrates their networks, by allowing network compatibility across its multiple platforms or through backward compatibility with a previous generation, then a cannibalization effect can occur where some (potentially all) prices decrease relative to their unintegrated counterpart. Finally, I highlight the main results in an illustration on the video game market.

Heterogeneous Merger Impacts on Competitive Outcomes

Mergers realize heterogeneous competitive effects on profits, production, and prices. To date, it is unclear whether differential merger outcomes are caused mostly by firms’ technology or product market attributes. Furthermore, empirical merger studies conventionally assume that, conditional on regressors, the impact of mergers on outcomes is the same for every firm. We allow the merger responses to vary across firms, even after controlling for regressors, and apply a random-coefficient or heterogeneous treatment effect model (in the context of Angrist and Krueger (1999), Heckman, Urzua, and Vytlacil (2006), and Cerulli (2012)). Based on a comprehensive dataset on the static random access memory industry, we find that firms’ postmerger output further increases (and postmerger price further declines) if merging firms are more efficient, operate in more elastic product markets, are more innovative, and acquire knowledge in technological areas that are relatively unexplored to themselves. A further interesting insight is that product market characteristics cause stronger postmerger outcome heterogeneities than do technology market characteristics. We also find that the postmerger effects accounting for heterogeneities differ greatly from those that consider homogeneous postmerger outcome effects. Our estimation results provide evidence that ignoring heterogeneous outcome effects can result in heterogeneity bias, just as ignoring premerger heterogeneities can lead to selectivity bias.

Post-merger Price Variation Matters, So Why Do Merger Retrospectives Ignore It?

The price effect of past mergers has been extensively researched over the past two decades. The overwhelming majority of these studies estimate the over-time average price effect of the merger. Merger guidelines agree that mergers should be approved if market dynamics, such as entry, eliminate negative welfare effects. Estimating price averages ignores key information about the post-merger dynamics of prices and is unable to identify if post-merger prices eventually revert to pre-merger levels. We provide evidence from a set of Monte Carlo experiments to show how serious this problem might be. Firstly, potentially all the studies that concluded - estimating post-merger over-time averages - that the merger led to a price increase, could have been wrong, and in fact the merger price increase disappeared within a reasonable time. Similarly, up to half of the studies that concluded that the merger did not increase prices could have been wrong in their conclusion.

What Can Merger Retrospectives Tell Us? An Assessment of European Mergers

In this review of retrospective European merger studies we provide a discussion of the price effect of analysed mergers and examine whether the antitrust agency made the right decisions. We find that remedied mergers, on average, were not followed by a price-increase, suggesting that, in our sample, merger interventions were effective at eliminating problems. High market concentration was more likely to lead to higher post-merger prices, although remedies were able to reduce post-merger price-increases, even in concentrated markets. We look at a number of reasons why prices may increase post-merger and find little evidence of genuine agency errors.