Horizontal Mergers With Free-Entry: Why Cost Efficiencies May Be a Weak Defense and Asset Sales a Poor Remedy

I analyze the effects of a merger between two firms in a spatially differentiated oligopoly. I make the crucial assumption that the industry is at a free-entry equilibrium both before and after the merger. In particular, I allow for the possibility of entry subsequent to the merger. Not surprisingly, this possibility improves the effect of the merger on consumer welfare. More importantly, I show that post-merger entry dramatically shifts the perspective on cost efficiencies as a merger defense and asset sales as a remedy. Cost efficiencies (in the form of lower marginal cost) decrease the likelihood of entry, and thus benefit consumers less than if entry conditions were exogenously given. Likewise, by selling assets (stores) to potential rivals, merging firms effectively \buy them o®," that is, dissuade them from opening new stores, an effect that is detrimental to consumers