Policy Brief: Mergers and Dynamic Efficiencies

When two businesses join to form one company, their combination sometimes creates positive effects called efficiencies. Generally speaking, efficiencies are synergies that enable firms to improve their performance, whether in terms of cost, quality, service, or the variety of products or services they offer. Some efficiencies are of a one-off or “static” nature while others are recurring or “dynamic”, but all of them are good for the welfare of society. Mergers may also raise concerns, however, related to market power and reduced competition. Merging companies sometimes argue that even though their proposed union may lessen competition, any resulting harm will be more than offset by the efficiencies that the merger would generate.

Efficiencies remain a thorny issue in merger analysis. Despite growing interest in efficiencies since the 1970s among competition authorities and courts, there has been a persistent reluctance to incorporate them in merger analysis. That reluctance is even greater with respect to dynamic efficiencies than it is with respect to static ones. The reason is that even in a static analysis, determining whether a merger is likely to lead to efficiencies and how they will compare with any anti-competitive effects the merger is expected to cause is quite difficult. Making the leap to predicting a merger’s dynamic effects is much harder still because the benefits may be more abstract in nature and will occur repeatedly – if at all – across time periods that are largely well into the future. Nevertheless, a growing body of commentators is asserting that enforcement agencies should pay more attention to dynamic efficiencies and less attention to short-run price effects, especially in markets where consumers have more to gain through innovation than through lower prices on existing products.

This Policy Brief explores some of the thorny issues that competition agencies confront when presented with arguments about dynamic efficiencies and looks at the desirability and difficulty of placing more emphasis on dynamic efficiencies in merger reviews.