The International Handbook of Competition
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The International Handbook of Competition

Edited by Manfred Neumann and Jürgen Weigand

This indispensable Handbook examines both economic and legal aspects of competition policy and industrial organization. It provides a scholarly review of the state of the art regarding economic theory, empirical evidence and standards of legal evaluation. The book aims primarily at furthering our understanding of the interplay between economic reasoning and legal expertise by concentrating on the fundamental issues and principles underlying competition policy.
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Chapter 2: Efficiency versus Market Power through Mergers

Dennis C. Mueller


67 where Si is firm i’s sales, mi is its market share, η is the industry elasticity of demand, and σ is the degree of product differentiation (0≤σ≤1) (Mueller, 1986, pp. 54–6). A degree of cooperation, θ, equal to 1 leads to the perfect collusion outcome, θ = 0 is the Cournot outcome and a negative θ such that the term in parentheses in (2.2) is zero produces the Bertrand equilibrium, price equal to marginal costs (assumed here to equal average costs). If we assume that two merging firms could always choose the same price and quantity combinations after a merger as before, a horizontal merger between firms i and j leads to the following objective function for the post-merger company i (ibid., p. 189) Oi = π i + π j + θ ∑ π k . k ≠i , j n (2.3) The horizontal merger effectively leads to perfect collusion between the two merging firms. As long as there was not perfect collusion among all firms in the industry before the merger, or Bertrand competition afterwards, the merger must lead to a higher price and reduced output after the merger. Thus, all horizontal mergers should be accompanied by some manifestations of a market power increase.1 Horizontal mergers can also lead to an effective increase in market power and higher prices if the reduction of the number of sellers increases the degree of cooperation, θ, for at least some firms in the industry. Vertical mergers The only anti-competitive effects of vertical mergers that have not by now been totally discredited are that...

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