Endogenous Mergers, Mavericks and Tacit Collusion: Experimental Evidence
with Donja Darai, Catherine Roux
Abstract: Do collusive purposes motivate merger activity and if so, what role do mavericks play? In this paper, we study whether firms’ collusive ability influences their incentives to merge because, when tacit coordination is unsuccessful, firms switch to mergers in order to reduce competitive pressure. Our experimental approach suggests that firms send more merger offers when prices are closer to marginal costs. Maverick firms that undercut prices and thereby foster market competition are the predominant receivers of these offers.
Concern about coordinated effects long has been central to U.S. merger policy. A merger has coordinated effects if it enhances the scope for collusion, tacit or explicit, in the post-merger market. One way a merger may achieve this is by reducing the number of independent decision makers. The structural presumption that high market concentration facilitates collusion enjoys vast theoretical and experimental support in economics.
In recent years, antitrust scholars have devoted increasing attention to the role of mavericks in destabilizing collusive agreements and thus to the importance of mavericks for coordinated effects in post-merger markets. A maverick is a firm that declines to follow the industry consensus and plays an unusually disruptive and competitive role in the market and thereby constrains effective coordination. U.S. antitrust authorities have repeatedly opposed mergers on the argument that these would remove a particularly aggressive competitor from the market.
In this paper, we report experimental evidence on the coordinated effects of mergers in Bertrand oligopoly markets with repeated interaction. We study how individual market players affect the competitive dynamic and how their elimination through a merger may impact the likelihood of coordination. To do this, we focus on firms’ decisions whether or not to merge in a setting where we allow the market structure to evolve dynamically and endogenously. The previous experimental literature takes either a static (between subjects) approach which compares oligopoly markets with different firm numbers or a dynamic (within subjects) approach in which the experimenters exogenously impose whether, when, and between whom the consolidations take place. Our experimental design allows firms to decide freely whether, when, and to whom they send merger bids. We can therefore examine firms’ motives behind merger decisions.
We have three main results. First, we find some evidence that mergers allow firms to tacitly collude and thereby to raise prices. In particular, we find support for the common wisdom that prices increase with market concentration which is in line with previous experimental studies. Second, we find that the lower the prices on the pre-merger markets, the more likely a merger occurs. This finding is novel for oligopoly experiments, and it suggests that mergers may serve a collusive purpose. Third, our data confirm that industry mavericks are the predominant receivers of the merger offers. The last two findings give support to the current U.S. merger policy with its emphasis on the elimination of a maverick as a collusion-facilitating device.