Efficiency gains and mergers
In the theoretical literature, strong arguments have been provided in support of the e ciency defense in antitrust merger policy. One of the most often cited results is due to Williamson (1968) that shows how relatively small reduction in cost could o set the deadweight loss of a large price increase. Furthermore, Salant et al. (1983) demonstrate that (not for monopoly) mergers are unpro table absent e ciency gains. The general result, drawn in a Cournot framework by Farrell and Shapiro (1990), is that (not too large) mergers that are pro table are always welfare improving. In the present work we challenge the conclusions of this literature in two aspects. First, we show that Williamson's results underestimate the welfare loss due to a price-increasing merger and overestimate the e ect of e ciency gains. Using the simple linear Cournot model, we show that e ciency gains needed to compensate for the deadweight loss are much larger than Williamson's. Then, we prove that the conditions for welfare improving mergers de ned by Farrell and Shapiro (1990) hold true only when consumers are adversely a ected. This seems an argument to disregard their policy prescriptions when antitrust authorities are more "consumers-oriented". In this respect, we provide a necessary and su cient condition for a consumer surplus improving merger: in a two rm merger, e ciency gains must be larger than the pre-merger average markup.