Mergers and Efficiencies: The Evidence

When everyone has an opinion, look at the evidence. With sound merger policy under attack from progressives that have infiltrated the antitrust agencies and some in Congress, policymakers would benefit from a review of the available evidence.

In a new paper, former antitrust enforcers catalogue and review dozens of studies, from dozens of economists, that found measurable examples of mergers creating efficiencies. Ultimately, the literature review of the studies supports the idea that mergers produce efficiencies, a proposition that until recently had been widely accepted as conventional wisdom.

The paper first categorizes numerous types of studies. The highest quality studies use rich datasets of plant-level manufacturing outputs and the changes in ownership of those plants.  Other studies attempt to measure a specific firm’s performance after a merger, and compare it to an appropriate “but for” alternative, the producer’s potential performance, or other criteria. A few studies directly measure various costs of production or market share before and after a merger. A final methodology involves in-depth case studies.

Based on this exhaustive review of the available evidence, a wide and varied range of empirical work finds that mergers produce efficiencies. Among other possible benefits, mergers can reduce the duplication of resources, allow production to scale, secure financing and supply chains, and spread technical expertise throughout the combined firm. As a result, the authors conclude, there is no reason to doubt the once-settled wisdom underpinning the basic framework for merger review: mergers are a legitimate means to advance procompetitive business objectives unless there is evidence that the unilateral, coordinated, or vertical effects of the merger will cause quality-adjusted prices to increase or innovation to decrease. 

Still, the empirical literature has its limits. Although many studies attempt to explain when or why mergers improve performance, the research is largely inconclusive, other than the common-sense finding that better managed firms can acquire assets from underperforming firms and use those assets more effectively. On the flip side, importantly there is no robust evidence that certain types of mergers are especially unlikely to result in efficiencies. Instead, mergers can lead to efficiencies in a wide range of industries, including for both goods and services, and for both highly commoditized products and highly differentiated products. 

From the paper, policymakers should draw several conclusions. First, there is no empirically supported reason to alter our enforcers’ case-by-case approach to analyzing efficiencies. Second, there is no reason for courts to change their assumption that business managers, who are closest to the industry in question, are best placed to judge which strategy—build, borrow, or buy—will best improve firm performance. Third, the research tends to undermine the basis for generalized skepticism of merger efficiencies. Indeed, the destruction of inefficient firms, sometimes accompanied by the acquisition of their assets, is a fundamental part of the process of competition, which necessarily leads to consolidation as those who compete most strongly on the merits win out.

Finally, and most importantly, we should reject the policy prescription to drastically alter merger review to assume no gains from mergers, or to place the initial burden of proof on the parties to justify their merger strategy. The agencies should, as they have in the past, make enforcement decisions taking into account the likelihood of efficiencies in any particular case.

Just look at the evidence.

About the authors

Sean Heather

Sean Heather is Senior Vice President for International Regulatory Affairs and Antitrust.

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