Mergers with homogeneous products: A primer

This paper provides an introduction into the economic effects of mergers in homogenous goods markets. We discuss the origins of market power in such markets and assess when a merger is likely to increase market power significantly. While market shares tend to be a good indicator for assessing the level of market power in homogenous goods mergers, the change in market power brought about by a merger is also affected by a number of additional important factors. Specifically, we explain the role of the elasticity of demand and of capacity constraints. Moreover, we discuss simple indicators such as profit margins and pivotality that help gauge the likely competitive effects of horizontal mergers. Our assessment distinguishes between short-run competition on price given fixed capacities and long-run capacity competition. We show that in the short run, merger effects tend to be most pronounced when demand and supply are relatively balanced, whereas in the long-run the market share increment caused by a merger is particularly important.