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Merges in Congested Markets

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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.

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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2004:8.

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Length: 21 pages
Date of creation: 20 Aug 2004
Handle: RePEc:hhs:sunrpe:2004_0008
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Department of Economics, Stockholm, S-106 91 Stockholm, Sweden

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