Efficiency gains and mergers

In the theoretical literature, strong arguments have been provided in support of the efficiencydefense in antitrust merger policy. One of the most often cited results is due to Williamson(1968) that shows how relatively small reduction in cost could offset the deadweight loss of alarge price increase. Furthermore, Salant et al. (1983) demonstrate that (not for monopoly)mergers are unprofitable absent efficiency gains. The general result, drawn in a Cournotframework by Farrell and Shapiro (1990), is that (not too large) mergers that are profitable arealways welfare improving.In the present work we challenge the conclusions of this literature in two aspects. First, weshow that Williamson's results underestimate the welfare loss due to a price increase andoverestimate the effect of efficiency gains. Then, we prove that the conditions for welfareimproving mergers defined by Farrell and Shapiro (1990) hold true only when consumers areadversely affected. This seems an argument to disregard their policy prescriptions whenantitrust authorities are more "consumers-oriented". In this respect, we provide a necessaryand sufficient condition for a consumer surplus improving merger: in a two firm merger,efficiency gains must be larger than the pre-merger average markup....