The Competitive Effects of Mergers Between Asymmetric Firms

Authors:
Charles J. Thomas
Working Paper:
220

The 1992 Horizontal Merger Guidelines suggest that the merger of two relatively weak competitors may result in a strong competitor and may lead to lower prices, despite the resulting increase in concentration. This paper introduces incomplete information into a simple model of repeated competition among firms that are asymmetric in their likely degree of efficiency at each stage of competition. In such a setting there do exist profitable yet price-reducing mergers among weaker firms. This model reasonably describes mergers between asymmetric firms that participate in auction or procurement settings and strengthens insights from the literature on asymmetric auctions regarding postmerger incentives for aggressive pricing. Finally, this model illustrates that the efficiencies described in the typical modeling of mergers in the asymmetric auction literature have private but not social benefits, and thus should not be permitted as a justification for merger.