Mergers – LearnEconomicsOnline

I recently came across a neat paper by around 25 economists (former chief economists at the US’ FTC and DoJ Antitrust Division) which provided a rebuke of attempts by econometricians to study the relationship between price and the Herfindhal-Hirschman Index (a measure of concentration).

As a general rule, when two firms merge horizontally (i.e. at the same level within the same market), there are two mechanisms which would tend to push prices up and a counteracting force which would put downward pressure on prices. The first two mechanisms (which tend to increase price) are called unilateral and co-ordinated effects. Unilateral effects come from the fact that the merged entity has more market power than before, and it can use this market power (to some degree) to push up prices.* [...]

Exxon and Mobil were 2 separate American oil companies that merged to form ExxonMobil in 1998. It resulted in the creation of the largest oil company in the world. This allowed it to reduce its costs. The first thing the new firm did was reduce its workforce by 7% (9000 workers) this is an example of avoiding duplication as these workers were doing similar things when the 2 firms were separate and hence weren’t needed in the unified firm. This allowed ExxonMobil to reduce its costs.

It led to a reduction in competition in the oil industry which potentially could have meant that prices weren’t as low for consumers as they could have been if the firms were competing. [...]

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Tag: Mergers

The forbidden regression of price on HHI

Merger Case Study: Exxon and Mobil