Mergers as an environmental ally: Socially excessive and insufficient merger approvals

This paper considers firms’ incentives to merge under duopoly, where we allow for product differentiation, cost asymmetries, and pollution intensities (green and brown goods). We first analyze mergers in the absence of environmental regulation, showing that mergers induce an output shift towards the lowest cost firm. When emission fees are introduced, however, firms also consider their relative pollution intensities, potentially reverting the above output shift. We show that firms have stronger incentives to merge when goods are more differentiated, costs are more symmetric, and products generate similar environmental damages. However, socially excessive mergers can arise when firms shift output to the more cost-efficient firm after the merger, which may cause more pollution. In contrast, socially insufficient mergers can arise if output shifts after the merger would have reduced pollution.