Approval Rules for Sequential Horizontal Mergers

Merger approval decisions lie at the heart of competition policies. Farrell and Shapiro (1990) presented a model stating safe harbour rules for merger approval. In the presence of sequential mergers, however, computation of the sufficient external effect criterion for each merger may not be possible as the second merger will be influenced by the equilibrium emerging from the first. If the mergers are close enough in time, the second merger must be evaluated without the knowledge of the equilibrium point after the first merger. Two alternatives are proposed: joint merger evaluation and independent merger evaluation. The decision errors (too many approvals or rejections) are identified for each of the alternative rules. It is shown that joint merger evaluations generate too many rejections of mergers and independent evaluations lead to too many approvals.