Horizontal mergers (that is, mergers between direct competitors) in concentrated industries are an important issue for competition authorities. In this chapter, we explore whether mergers are profitable and/or welfare enhancing. Merger control in the US has a long tradition going back to the Clayton Act from 1914, according to which mergers that lead to a substantial lessening of competition are forbidden. The current approach is outlined in the 1992 Horizontal Merger Guidelines. Merger control in the European Union was introduced in 1990 (before, individual member states were in charge) and substantially revised in the 2004 Horizontal Merger Guidelines. We refer you to Appendix B for a few more details on the legal aspects of competition policy.

Although the empirical evidence on the profitability of mergers that actually took place is mixed, we should not observe (in expectation) unprofitable mergers under the assumption that managers maximize the net value of the firm. Thus, from an antitrust perspective, the worrying cases are profitable but welfare-reducing mergers. Mergers that are at the same time profit-increasing and welfare-reducing only occur in imperfectly competitive markets: mergers among competing firms with market power tend to reduce competition and thus have anticompetitive price effects. However, this does not imply that mergers are necessarily welfare-reducing because a merger may realize efficiency effects.