Mergers, Entry, and Consumer Welfare

Abstract

We analyze mergers and entry in a differentiated products oligopoly model of price competition. We prove that any merger among incumbents is unprofitable if it spurs entry sufficient in magnitude to preserve consumer surplus. Thus, mergers occur in equilibrium only if barriers limit entry. Numerical simulations indicate that with profit-neutral mergers --- the best-case for consumers --- entry mitigates under 30 percent of the adverse price effects and, in most cases, under 50 percent of the consumer surplus loss. The results suggest a limited and conditional role for entry analysis in merger review.