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When should the government challenge a merger that might increase market power but also generate efficiency gains? The dominant belief has been that the government and courts should evaluate these mergers solely in terms of economic efficiency. Congress, however, wanted the courts to stop any merger significantly likely to raise prices. Substantially likely efficiency gains should therefore affect the legality of mergers to the extent that they are likely to prevent price increases. This standard is more strict than the economic efficiency criterion, because the latter would permit mergers substantially likely to lead to higher prices, if sufficient efficiency gains were substantially likely.

The authors analyze the competing price effects of market power increases and efficiency gains in the most relevant context: significant mergers in concentrated markets - oligopoly. They derive four general oligopoly models and evaluate them over all reasonable ranges for their underlying parameters. This methodology avoids biases due to overly restrictive assumptions.

By using the Merger Guideline standards and data from mergers that the Federal Trade Commission closely examined, the authors analyze empirically relevant tradeoffs between market power increases and efficiency gains. They find that decreases in marginal costs of 0 to 9% could be necessary to prevent price gains from mergers typical of those the government regularly evaluates. Cost savings in the upper portions of this range are far larger than those that previous authors have suggested would be necessary to compensate for efficiency losses from most mergers. They are also far greater than efficiency gains that one could realistically predict from virtually any merger. Moreover, if a merger significantly increased the probability of collusion, the required cost savings would be even greater.

The authors' models and a large number of practical considerations suggest that implicit consideration of efficiency gains, through adjustment of the standards for horizontal mergers, would be better than an explicit case-by-case efficiency defense.





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