By Michał Grajek, Klaus Gugler, Tobias Kretschmer and Ion Mişcişin
In this paper, BCCP Senior Fellow Michał Grajek and his co-authors Klaus Gugler, Tobias Kretschmer and Ion Mişcişin shed light on the broader efficiencies related to merger activities by investigating effects that go beyond the standard price effects. In particular, the authors are interested in how the immediate price effects of M&As correlate with other important economic indicators, such as investment in quality and innovation.
It is well established that mergers and acquisitions (M&As) directly influence price levels in the industries undergoing concentration, which justifies the existence of (horizontal) merger control. Further, there are a number of studies concluding that merger-related efficiencies can outweigh the increase in market power, thus rendering mergers pro-competitive, especially over the long-term. More generally, long-term, dynamic merger efficiencies are often studied in terms of the merger’s impact on investments and innovations. However, early economic literature on this is largely inconclusive. Two explanations for the inability to find general conclusions about the role of mergers for dynamic efficiency are that i) the effects may not be linear and ii) there may be substantial heterogeneity in the way dynamic efficiencies are realized across industries.
The novelty of this paper is to study the effects of M&As on both market prices and firm investments to see if the static and dynamic effects are related. To this end, the authors use a multiple-single-case approach: They study five mergers among mobile telecommunications carriers in four European countries and look at the effects of mergers on two outcomes: prices as a measure of static efficiency, which is determined by the current firm’s market power and costs, and capital expenditures as a measure of the firms’ investment incentives. While there is no way of statistically comparing the five cases, interesting patterns emerge: In two out of the five cases, the effect on static efficiency is positive, in two, it is negative (in one it is insignificant), but in nearly all scenarios, merging as well as rival firms’ prices moved mostly in the same direction. Moreover, the authors find a positive correlation between the price and the investment effects. In markets with an increase in price (i.e., a decline in static efficiency), all firms reported an increase in capital expenditure, suggesting a stronger focus on dynamic efficiency; the opposite effect prevails in the markets that saw a decrease in prices after a merger. These results point to a tradeoff between static and dynamic efficiency: while two countries provide indicative evidence of an increase in static efficiency at the expense of less investments, the other two displayed higher investments into future infrastructure at the expense of higher post-merger prices.
In a narrow sense, this study contributes to the literature on merger effects in the telecommunications industry. However, the results make two broader points: i) mergers must be assessed for their static and dynamic effects on the evolution of an industry and ii) the effects of mergers are highly context specific, even in the same industry. From a policy perspective, it is also notable that competition policy may interact with science and technology policy in the sense that investments in infrastructure may be affected by competition policy instruments. This calls for an integrated view on these two policy aspects.
The full paper “Static or dynamic efficiency: Horizontal merger effects in the wireless telecommunications industry” is forthcoming in the Review of Industrial Organization.