Product differentiation, cost-reducing mergers, and consumer welfare

Cost synergies are an explicitly recognized justification for a two-firm merger, and empirical techniques are now widely used to assess the impact of cost-reducing mergers on prices and welfare in the post-merger market. We show that if the merger occurs in a vertically product differentiated market, then the merger will lead to a reduction in product offerings that limits the usefulness of pre-merger empirical estimates. Indeed, we further show that in such markets, two-firm mergers will typically lead to higher prices regardless of the merger's cost savings.