Merger Types

The starting point of our model is the fact that mergers have implications on the merging firms’ profits (π^M), competitor’s profits (π^C), and on welfare (W), as measured by the welfare standard applied. We shall neglect the merging firms’

decision in our model in the sense that merging firms will not strategically interact with competitors or the authority in this game. We then assume that the author-ities posit a welfare standard for their merger decisions and that competitor firms operate as profit maximisers. For our analysis, it does not matter whether the authority, say, applies a total or a consumer welfare standard. Denote by ∆ the change of a given variable due to clearing a merger. Mergers then can carry all kinds of combinations of ∆π^C and ∆W and in all degrees, such as slightly positive

∆π^C while having vastly negative ∆W, etc. It is therefore useful to visualise a grid with four quadrants with ∆π^C and ∆W on the axes. Mergers can then be plotted in all four quadrants based on their implications on ∆π^C and ∆W. The origin of that grid is understood as the status quo, which prevails if the merger is blocked by the authority.

Our analysis thus distinguishes four merger types, where, for simplicity we restrict to ∆π^C,∆W ∈ {−1,1}, modeling the direction in which a clearance decision would alter welfare and the competitor’s profit. This is, naturally, a very simplifying assumption, but it allows us to keep the analysis straightforward and get clear results while still tackling the relevant strategic issues. Apart from that, it might already be a challenging task in practice to place a given merger correctly

25 For the sake of simplifying the model, we leave out the option of a clearance decision with remedies, either in Phase 1 or Phase 2.

within our four-quadrant model. From a policy perspective, it might also not be practicable to analyse a more general model where ∆π^C and ∆W are distributed on a finer grid, as this would require the authority to attach probabilities to each of the many types.

This taxonomy of merger types has the advantage that it is complete as it covers all conceivable types, independent of their practical relevance. Moreover, it allows us to distinguish types based on the two sides’ (the competitor’s and the authority’s) preferences, which might be aligned or not. The practical relevance of each merger type is captured by the authority’s prior information which attaches a probability to each conceivable type.

In this context, it may be illustrative to draw upon the taxonomy of mergers, proposed by Clougherty and Duso [2011, p. 314]. They use the general IO frame-work to distinguish between four different types of mergers, depending on the merging firms’ post-merger profits (π^M) and the competitors’ post-merger profits (π^C):

Table 4.1: Merger Taxonomy

∆π^M >0 ∆π^M <0

∆π^C >0 collusion-based synergistic nonsynergistic

∆π^C <0 efficiency-based synergistic value-destroying

The taxonomy cannot be applied directly to our purposes since, as just men-tioned, we regard π^C and W (instead of π^M). In the case of collusion-based synergistic mergers, the increase in market power absent efficiency gains leads to higher prices and profits both with the merging firms and the competitors. Con-sumers get hurt by the raised prices so that consumer surplus will fall. It may be expected that total welfare also falls as a result. Efficiency-based synergistic mergers enable the merging firms to decrease their prices due to efficiency gains

which hurts the competitors’ profits.²⁶ Consumers will benefit from lower prices and we can expect total welfare to rise as a result.

If ∆π^M <0, Clougherty and Duso [2011] speak of value-decreasing or unprof-itable mergers. Their explanation for these mergers can hardly be found in IO theory, since firms would not merge if profits were negative, but rather in the fact that managers make errors or overestimate post-merger profits. Managerial hubris or incompetence, political reasons, empire-building are some reasons why mergers are still notified in practice.²⁷ Non-synergistic mergers are mergers where the merging firms lose while the competitors gain; in most cases, these are merg-ers where the expected synergies did not materialise and thus the merger was unprofitable.²⁸ Competitors could profit from a weakening of the merging firm’s power since it creates a competitive opportunity. It is not evident what the total welfare effects in such case would be but we can expect welfare to decrease rather than increase, as consumers will not benefit from the competitors’ gain. Finally, value-destroying mergers constitute such group of mergers where both merging firms and competitors make losses. According to the literature, such mergers entail efficiencies to the detriment of competitors but also high integration costs for the merging firms themselves.²⁹ Total welfare is likely to decrease.

Mergers with positive ∆π^C and positive ∆W may not necessarily be intuitive to substantiate: However, Heubeck et al. [2006, p. 38] give an example where this might still happen, namely if the more efficient firm in a market is an outside firm and the merging firms do not realise any cost efficiencies, but average marginal costs in the market fall when the merging firms will reduce their output, while the efficient competitor will raise output. In spite of rising prices, total welfare will then rise.

The types proposed by Clougherty and Duso [2011] can be – roughly – fitted into our grid without claiming completeness, see Figure 4.3.

26Farrell and Shapiro [1990].

27Clougherty and Duso [2011, p. 313] with further references.

28Amir et al. [2009].

29Clougherty and Duso [2011, p. 314] with further references.

Figure 4.3: Taxonomy of Merger Types

∆W

∆π^C

collusion-based synergistic

efficient competitors

nonsynergistic

value-destroying

efficiency-based synergistic

1