Horizontal Merger Guidelines Review Project
The usage of product differentiation as a strategic tool in price competition or in anticipation of a merger has the potential to undo the benefits to consumers of a stricter merger policy or a particular merger blockage. Note that, when firms expect price competition, they strategically maximize horizontal product differentiation to sustain higher prices in equilibrium (d'Aspremont, Gabszewicz, Thisse, 1979). This is because when a rival's product becomes more differentiated, a given price reduction then induces fewer of the rival's customers to switch. On the other hand, when firms expect a merger, they tend to decrease or minimize product differentiation. This is because choosing a product closer to that of the competitor's improves the bargaining power regarding the acquisition price and maximizes the joint profit of the global firm (Jehiel (1992), Friedman and Thisse (1993)). The existence of merger control induces an uncertainty to the expectations of firms about the future market structure (future market structure is neither expected to be merger with 100%, nor price competition with 100%), so the product differentiation levels also reflect this uncertainty in equilibrium (Ecer, 2002). Now consider the introduction of a new stricter merger policy (or equivalently, a particular merger-blockage). A stricter merger control policy increases the expectation of future price competition. In response, firms are likely to increase product differentiation to sustain higher prices in equilibrium. Thus, the equilibrium prices are policy-variant. Moreover, the higher equilibrium prices have the potential to neutralize the benefits to consumers from the stricter merger policy. Failing to account for such policy-variant prices may lead to overestimation of the increase in consumer surplus due to the stricter merger policy. The same logic applies to a particular merger-blockage. Specifically, after a merger-blockage firms may still increase equilibrium product differentiation and sustain higher prices than pre-merger levels (Ecer, 2005). In the attached piece, I address how merger control policy can be improved to address the possibility discussed above in relation to questions 2e, 10g, 10h, and 20.