Could Politicians Be More Right Than Economists? A Theory of Merger Standards

Abstract

Most large competition authorities are required to appraise a merger proposal on the basis of its impact on consumer welfare. This is in opposition to the economist’s classic recommendation to include profits in the social evaluation. This paper shows that the latter total welfare standard is generally sub-optimal because firms have an advantage in proposing mergers. Where alternative merger opportunities are available, the consumer welfare standard can achieve higher total welfare. The conditions for this are more likely to be satisfied in large, complex or internationally integrated economies.

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