MERGING LAGGARDS

We argue that mergers among market laggards (new entrants or innovation challengers) should be treated differently than those involving leaders (established players or first-mover innovators). We show that these mergers can be rivalry-enhancing, either by accelerating entry or promoting innovations, leading to lower quality-adjusted prices and higher consumer surplus. This is more likely to happen when entry (or innovation) costs are relatively high, so that entry (or innovation) is profitable only when it is limited to a few players. In these circumstances, if laggards enter, they will do so probabilistically and inefficiently since each of them would have to condition its entry to scenarios in which other laggards stay out, which may not be possible since entry decisions are secret. By removing or mitigating this coordination failure, a merger among laggards may lead to more entry (or innovation). Such a merger will also be more likely to benefit consumers when the products of laggards and leaders are sufficiently differentiated—that is, when competition is not too intense absent the merger. Importantly, we find that in the presence of fixed entry costs and endogenous entry, fixed cost synergies are relevant for assessing the welfare effects of mergers. These efficiencies enhance the social value of mergers among laggards insofar as they make entry into the market for the merged entity less costly, thereby expanding the spectrum of products available to consumer and increasing their welfare.