Document Type

Article

Publication Date

2005

Status

Accepted

Abstract

Mergers have the potential for negative social welfare consequences from increased likelihood or effectiveness of future collusion. This raises the question of whether there are meaningful thresholds for the post-merger industry that should trigger significant scrutiny by the Department of Justice or Federal Trade Commission. This paper provides empirical analysis relevant to this question. The data does not come from an industry in which there were mergers, but instead from an industry in which explicit collusion was admittedly rampant in the 1990's, the Vitamins Industry. Different vitamin products are produced by different numbers of firms, and for different vitamin products, different numbers of firms were involved in the conspiracy. In analyzing post-plea pricing, we find that duopolies continue as if the explicit conspiracy never stopped, while products with three or four cartel firms return to pre-conspiracy pricing, or lower, quite quickly. Although it is difficult to extrapolate to other industries, the evidence suggests that, by itself, a proposed reduction in the number of firms manufacturing a given product from four to three via a merger is not problematic in terms of conduct following explicit collusion. The danger of a three-firm industry is that it is close to duopoly, and the collusive benefits of duopoly appear to be sustainable well past intervention by enforcement authorities.

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