Media Briefings

Microsoft and Yahoo! Why Such Mergers May Be Bad News For Consumers

  • Published Date: March 2008


Allowing the second-biggest firm in an industry to get stronger by acquisition or by
the dominant firm selling off capacity can have the opposite effect to the regulators
intent, weakening competition and hurting consumers through higher prices. That is
the finding of new experimental research by Professor Hans-Theo Normann and Dr
Miguel Fonseca published in the March 2008 issue of The Economic Journal.
Their findings have implications for many merger cases, including the pending
takeover of Yahoo! by Microsoft They also have implications for the announcement
by European electricity giant Eon in February 2009 that it will be selling off 20% of its
power plant capacity, a move seen as designed to appease regulators.
Regulators typically step in to prevent the largest firm in the industry taking over
another firm. But they tend to be more relaxed about the second-biggest firm
growing in this way – the idea being that a larger ‘challenger’ will be better able to
compete against the market leader.
So regulators might allow the takeover of Yahoo! by Microsoft (the new firm would be
second to Google in internet searches). But the experimental evidence from this
study suggests that two equally large firms are prone to collude – and this harms
consumers.
The report finds that:
• Mergers raise prices (by about 14%) and so are bad for consumers.
• But redistributing capacity away from the largest firm to the second largest
does not result in lower prices. If some capacity is transferred from the largest
to the second largest firm, then prices rise even more (by about 27%).
The reason that strengthening the second largest firm can harm consumers is that
two firms of equal size are much more likely to collude than if one is much larger
than the other. Although explicit price-fixing agreements are illegal, firms still watch
the price charged by others. And while a firm will be unlikely to slash prices if they
know that their equally large rival will ‘punish’ them by following suit, a firm with no
large rival is more able, and willing, to cut prices.
This runs counter to conventional thinking, which suggests that weakening the
dominant firm should improve competition. Competition authorities have therefore
imposed merger remedies and requested that a newly merged firm sell off part of its
capacity to a competitor to create a more symmetric and thus less concentrated
market structure.
ENDS
Notes for editors: ‘Mergers, Asymmetries and Collusion: Experimental Evidence’ by
Hans-Theo Normann and Miguel Fonseca is published in the March 2008 issue of
the Economic Journal.
Hans-Theo Normann is at Royal Holloway, University of London. Miguel Fonseca is
at University of Exeter.
For further information: contact Hans-Theo Normann on 01784 414003 (email:
hans.normann@rhul.ac.uk); Miguel Fonseca on 01392 262584 (email:
M.A.Fonseca@exeter.ac.uk); or Romesh Vaitilingam on 07768 661095 (email:
romesh@compuserve.com).