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

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  • Massimo Motta
  • Emanuele Tarantino

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.

Suggested Citation

  • Massimo Motta & Emanuele Tarantino, 2017. "The Effect of Horizontal Mergers, when Firms Compete in Prices and Investments," Working Papers 987, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:987
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    More about this item

    Keywords

    horizontal mergers; innovation; investments; network-sharing agreements; competition;
    All these keywords.

    JEL classification:

    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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