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Merges in Congested Markets

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Abstract

This paper analyses the effects of mergers on price and welfare in markets facing congestion and derives conditions under which a merger is consumer welfare improving, even in the absence of marginal cost savings. In our context a merger basically has two effects. First, it obviously increases market concentration. Second, it makes the new entity a more aggressive competitor. The paper shows that mergers that entail a more efficient use of installed capacity can result in important price reductions. Moreover, even when the post-merger price of the new merged entity increases, the outsiders may respond by decreasing prices and the overall effect may be a consumer welfare gain. Thus, the current merger policy may be inappropriate in these types of markets. From a policy perspective it could thus be argued that the competition authorities should demand less in terms of “standard” merger-efficiencies in order to approve the merger in a congested market, and especially when there are synergies in terms of capacity utilization.

Suggested Citation

  • Häckner, Jonas & Razo, Carlos, 2004. "Merges in Congested Markets," Research Papers in Economics 2004:8, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:2004_0008
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    Keywords

    mergers; congestion; capacity utilization;

    JEL classification:

    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General

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