The Effect of Horizontal Mergers, when Firms Compete in Prices and Investments

Abstract

It has been suggested that mergers, by increasing concentration, raise incentives to invest and hence are pro-competitive. To study the effects of mergers, we rewrite a game with simultaneous price and cost-reducing investment choices as one where firms only choose prices, and make use of aggregative game theory. We find no support for that claim: absent efficiency gains, the merger lowers total investments and consumer surplus. Only if it entails sufficient efficiency gains, will it be pro-competitive. We also show there exist classes of models for which the results obtained with cost-reducing investments are equivalent to those with quality-enhancing investments.

Published as: The effect of horizontal mergers, when firms compete in prices and investments in International Journal of Industrial Organization , Vol. 78, September, 2021