Does Merger Simulation Work? Evidence from the Swedish Analgesics Market

We analyze a large merger in the Swedish market for analgesics (painkillers). The merging firms raised prices by 40 percent, and some outsiders raised prices by more than 10 percent. We confront these changes with predictions from a merger simulation model. With basic supply side assumptions, the models correctly or moderately underpredict the merging firms' price increase. However, they predict a larger price increase for the smaller firm, which was not the case in practice, and they underpredict the outsiders' responses. We consider several supply side explanations: a plausible cost increase after the merger and the possibility of partial collusion. (JEL C63, D22, G34, L11, L25, L65)

Complete Versus Partial Collusion in Competing Coalitions

In this paper, we develop a non-cooperative game theoretic model for our problem context in which the competing producers adopt one of the two alternate production and marketing technologies — efficient and inefficient. We examine stability related implications of the producers' decisions regarding the choices of (i) technologies, (ii) coalition formation, (iii) coalition form, (iv) intensity of collusion. The coalitions can adopt either complete collusion or partial collusion by determining intensity of collusion using endogenously determined sharing rules. The motivation for our study comes from the Costa Rican coffee industry and interesting findings presented in the existing literature focusing on a variety of competing-coalitions settings. Our results can be categorized as: (i) Nash equilibrium of the endogenously determined sharing rules, (ii) the equilibrium coalition forms, and (iii) stability of coalitions. They highlight the dynamics between the number of coalition producers and the cost of inefficiency. We show that the equilibrium sharing rules may have interior solutions and they are not necessarily (a)symmetric. We also show that both coalitions forming complete collusion of the respective producers in not always a Nash equilibrium, and the equilibrium coalition forms need not be (a)symmetric. Our main contribution to existing literature rests in determining the situations in which (i) competing players form coalitions, and (ii) they adopt the coalition form of either complete or partial collusion. Moreover, we provide an alternate explanation to why competing producers horizontally merge in the presence of a competing coalition adopting partial collusion in spite of the merger paradox. We also show that none of the two types of producers considered in this paper have any incentives in not making the information on their coalition form public. Moreover, we establish that situations yielding stable coalitions always exist. Our results demonstrate that the cost advantage to the efficient producers decreases in the number of producers adopting the efficient technology, and the coalition stability related conditions need not imply better profitability for one type of producer vis-à-vis the other. Our model essentially provides a platform for future research in a variety of competing-coalitions settings adopting endogenously determined sharing rules.

Input Production Joint Venture

In many industries, it is quite common to observe firms delegating the production of essential inputs to independent ventures jointly established with competing rivals. The diffusion of this arrangement and the favourable stance of competition authorities call for the assessment of the social and private desirability of Input Production Joint Ventures (IPJV), which represent a form of input production cooperation, scantly investigated so far. IPJV can be seen as an intermediate organizational setting lying between the two extremes of vertical integration and vertical separation, with a major difference, due to partial collusion. Our investigation is based on an oligopoly model with horizontally differentiated goods. We characterize the conditions under which IPJV is privately optimal finding that firms' incentives may be welfare detrimental. We also provide a rationale for the empirical relevance of IPJV both in terms of its ability to survive and in terms of disengagement incentives which account for the large number of divorces among members of joint ventures. The stance of the paper as to IPJV is more cautious with respect to the received wisdom of competition authorities and in favour of the wide application of the rule of reason.