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Firm-specific cost savings and market power

Author

Listed:
  • Douglas D. Davis

    (Department of Economics, Virginia Commonwealth University, Richmond, VA 23284-4000, USA)

  • Bart J. Wilson

    (Economic Science Laboratory, University of Arizona, McClelland Hall Room 116,P.O. Box 210108, Tucson, AZ 85721-0108, USA)

Abstract

We report a policy experiment that illustrates a potential problem of using historical pass-through rates as a means of predicting the competitive consequences of projected firm-specific cost savings in antitrust contexts, particularly in merger analysis. The effects of cost savings on welfare can vary vastly, depending on how the savings affect the industry supply schedule. In a capacity-constrained price-setting oligopoly, we observe that cost savings can overwhelm behaviorally salient market power incentives when the savings affect marginal (high cost) units. However, cost savings of the same magnitude on an infra-marginal unit leave market power unchanged.

Suggested Citation

  • Douglas D. Davis & Bart J. Wilson, 2000. "Firm-specific cost savings and market power," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 545-565.
    • Handle: RePEc:spr:joecth:v:16:y:2000:i:3:p:545-565
    Note: Received: December 7, 1998; revised version: October 25, 1999
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    Citations

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    Cited by:

    1. John Ashton & Khac Pham, 2007. "Efficiency and Price Effects of Horizontal Bank Mergers," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2007-09, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    2. Jordi Brandts & Antonio Cabrales & Gary Charness, 2007. "Forward induction and entry deterrence: an experiment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(1), pages 183-209, October.
    3. Davis, Douglas D. & Wilson, Bart J., 2005. "Differentiated product competition and the Antitrust Logit Model: an experimental analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 57(1), pages 89-113, May.
    4. Steffen Huck & Kai A. Konrad & Wieland Müller & Hans-Theo Normann, 2007. "The Merger Paradox and why Aspiration Levels Let it Fail in the Laboratory," Economic Journal, Royal Economic Society, vol. 117(522), pages 1073-1095, July.
    5. Luis Gautier & Mahelet G. Fikru, 2024. "Welfare Impact of New Firm Acquisition," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 105-132, Springer.
    6. Davis, Douglas D. & Wilson, Bart J., 2008. "Strategic buyers, horizontal mergers and synergies: An experimental investigation," International Journal of Industrial Organization, Elsevier, vol. 26(3), pages 643-661, May.
    7. Rogers, Douglas B. & Smith, Adam C. & Wilson, Bart J., 2013. "Violence, access, and competition in the market for protection," European Journal of Political Economy, Elsevier, vol. 29(C), pages 1-17.
    8. Darai, D. & Roux, C. & Schneider, F., 2019. "Mergers, Mavericks, and Tacit Collusion," Cambridge Working Papers in Economics 1984, Faculty of Economics, University of Cambridge.
    9. Douglas Davis & Bart Wilson, 2006. "Equilibrium Price Dispersion, Mergers and Synergies: An Experimental Investigation of Differentiated Product Competition," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 13(2), pages 169-194.
    10. Douglas Davis, 2016. "Experimental Methods for the General Economist: Five Lessons from the Lab," Southern Economic Journal, John Wiley & Sons, vol. 82(4), pages 1046-1058, April.
    11. Jan Potters & Sigrid Suetens, 2013. "Oligopoly Experiments In The Current Millennium," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 439-460, July.

    More about this item

    Keywords

    Market power; Cost savings; Efficiencies and antitrust analysis; Pass-through rate.;
    All these keywords.

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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