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The Role Of Fixed Cost Savings In Merger Analysis

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  • Robert Rubinovitz

Abstract

Among the many motivations for mergers, clearly one of the more important considerations is the extent to which the merger will generate cost savings for the firms involved. Standard economic models demonstrate that a decrease in marginal cost leads to a lower price, whereas a decrease in fixed costs does not necessarily have this effect. Thus, from the Antitrust Agencies' perspective, in a merger analysis, emphasis should be placed on marginal cost savings because these efficiencies will create short-run benefits for consumers, in terms of lower price and higher output, and should be given the most weight. Of late, increasing attention has been given to how fixed cost savings can improve consumer welfare. One key insight is that demonstrating the direct effects of fixed cost savings on consumer welfare may require a longer time horizon than marginal cost savings or may require embedding these savings in a dynamic context. This paper exhibits an approach that provides straightforward predictions on the relationship between fixed costs, prices, and consumer welfare. When the fixed cost of producing quality decreases, it is shown that consumer welfare increases. The clear implication of this model is that fixed cost savings should be given weight in the analysis of the potential effects of a merger on consumer welfare.

Suggested Citation

  • Robert Rubinovitz, 2009. "The Role Of Fixed Cost Savings In Merger Analysis," Journal of Competition Law and Economics, Oxford University Press, vol. 5(2), pages 233-247.
  • Handle: RePEc:oup:jcomle:v:5:y:2009:i:2:p:233-247.
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    File URL: http://hdl.handle.net/10.1093/joclec/nhn032
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    Cited by:

    1. Gudmundsson, Sveinn Vidar & Merkert, Rico & Redondi, Renato, 2020. "Cost structure effects of horizontal airline mergers and acquisitions," Transport Policy, Elsevier, vol. 99(C), pages 136-144.
    2. David E. M. Sappington & Dennis L. Weisman, 2021. "Vertical Merger Policy: Special Considerations in Regulated Industries," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 59(2), pages 393-407, September.

    More about this item

    JEL classification:

    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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