Mergers with Future Rivals Can Boost Prices, Intensify Market Concentration, and Bar Entry

In 2010, the Federal Trade Commission (FTC) stated that mergers between incumbents and future rivals may be anticompetitive. Lacking evidence, however, this statement was never used in litigation. This study empirically examines the statement. In 2012, an incumbent pharmaceutical firm acquired a promising future rival that was expected to enter competition within two years. First, I find strong evidence that, immediately after the merger, the incumbent boosted its existing drug prices. Second, the merger indirectly boosted the incumbent’s quantity of sales: higher drug prices increased the marginal returns on advertisement, and realizing that, the incumbent amplified its advertisement expenditures after the merger, and achieved a higher quantity of sales and market share. It explains how mergers with future rivals can increase market concentration by influencing advertisement. Third, mergers with future rivals can create strong entry barriers: by identifying and acquiring promising future rivals, incumbents can maintain their market dominance and postpone competition indefinitely. While mergers with future rivals are endemic to the pharmaceutical industry, I introduce a variation of it that explains the motive for major software industry mergers such as Facebook’s acquisition of Instagram and WhatsApp and Google’s takeover of Android and YouTube. Last, I propose an alternative merger analysis framework that suits mergers with future rivals.