Mergers with Nascent Rivals Can Boost Prices, Bar Entry, and Intensify Market Concentration

It is theoretically shown that mergers between incumbents and nascent competitors (future rivals or fringe firms) can boost prices and reduce consumer welfare. But no merger has been litigated on this basis due to a lack of empirical evidence. To offer empirical insights, I study the acquisition case of a promising future rival by a large incumbent pharmaceutical firm. First, I find strong and causal evidence that the merger has enabled higher prices for the incumbent. Mergers with nascent competitors are practically unregulated and, if wisely exploited, they can circumvent antitrust enforcement and bar entry in the short and long run. Second, in contrast to the mainstream prediction that mergers with future rivals do not change market concentration, I report a large post-merger increase in the market concentration. To explain it, I introduce advertisement expenditures as a novel channel of effect between mergers and market concentration. Third, I document spillover effects of the merger on the incumbent’s immediate rivals without affecting its distant rivals. Fourth, I generalize the findings to explain the motives for software industry mergers such as Facebook’s acquisition of Instagram and WhatsApp and Google’s takeover of Android and YouTube. I also introduce a framework for analyzing mergers with nascent rivals