Setting Upper Limits on Merger Related Efficiencies

The purpose of this paper is to show that a complementary entry analysis could be performed by the authorities when assessing the welfare impacts of a merger. In addition to analyzing the likelihood and impact of post-merger entry by other firms, the authorities could also study pre-merger alternatives for the insiders, that is, to study wether other concentration operations were available but not chosen by the merging or acquiring firms. This may be particularly useful when the authorities are faced with a concentration operation that raises anti-competitive concerns. Insiders will argue that cost reductions are likely to compensate these negative effects. However, if the cost reductions are not firm specific it is possible, in some circumstances, to establish an upper limit on the extent of cost reductions when there are other mergers available. If these mergers were admissible but were dominated by the present one, information is revealed about the extent of cost reductions. This information may lead to the authorities updating their beliefs on efficiencies. Such updates may lead to the modification of the decision to approve or reject the merger.