The Effect of Horizontal Mergers, when Firms Compete in Prices and Investments

• Authors: Massimo Motta.
• BSE Working Paper: 110461 | September 17
• Keywords: investments , competition , horizontal mergers , innovation , network-sharing agreements
• JEL codes: K22, D43, L13, L41
• investments
• competition
• horizontal mergers
• innovation
• network-sharing agreements

It has been suggested that mergers, by increasing concentration, raise incentives to invest and hence are pro-competitive. To study the effects of mergers, we rewrite a game with simultaneous price and cost-reducing investment choices as one where firms only choose prices, and make use of aggregative game theory. We find no support for that claim: absent efficiency gains, the merger lowers total investments and consumer surplus. Only if it entails sufficient efficiency gains, will it be pro-competitive. We also show there exist classes of models for which the results obtained with cost-reducing investments are equivalent to those with quality-enhancing investments.