17 - The Economics of Horizontal Mergers

Summary

Horizontal mergers are ubiquitous in health care markets. Mergers are horizontal when two or more competitors join forces. They can be anticompetitive, procompetitive, or competitively neutral. A merger can increase market power when it so alters the market structure that either the newly merged entity would have the ability to exercise unilateral market power or would be more likely to collude overtly or tacitly with its competitors. The economic concerns surrounding either unilateral or coordinated effects are familiar: higher prices, lower quantity and/or lower quality, and reduced consumer or social welfare. But mergers can also lead to substantial efficiencies that increase social welfare by freeing up resources for other socially beneficial pursuits. Gains in efficiency improve profits by reducing costs, while gains in quality improve profits by making the merged firm’s output more attractive to consumers. In this chapter, we discuss firm incentives to merge and examine the trade-off between changes in market power and efficiencies.