Post-merger Price Dynamics Matters, So Why Do Merger Retrospectives Ignore It?

Click here to read the full article online

The price-effect of past mergers has been extensively researched over the past two decades. The overwhelming majority of these studies estimate the over-time average price effect of the merger. This is counter-intuitive because merger guidelines agree that no intervention is needed if the post-merger price increase disappears within a reasonable amount of time, for example because of new entry. Of course, for entry to occur a potential entrant would have to find such entry profitable, and the extent of entry would have to be such that prices would revert to (or remain at) pre-merger levels. Retrospective studies could verify whether these conditions were fulfilled after a merger. However, entry and its effects are a gradual process. Looking at the average effect after the merger (often averaged over many years) masks important information about this process. Instead, this would require looking at the dynamics of post-merger prices in order to identify whether pre-merger expectations about entry and the effect of entry were correct.