Department of Economics and Business - Universitat Pompeu Fabra

Title:: The effect of horizontal mergers, when firms compete in prices and investments
Authors:: Massimo Motta and Emanuele Tarantino
Date:: August 2017
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.
Keywords:: Horizontal mergers, innovation, investments, network-sharing agreements, competition.
JEL codes:: K22, D43, L13, L41
Area of Research:: Business Economics and Industrial Organization

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