Do mergers always lead to price increases?
Date posted: January 20, 2014
Many fliers are worried about what the merger between American Airlines and U.S. Airways will mean for airfares. And this raises the general question, What do mergers of large national companies ultimately do to the prices consumers pay? With less competition, shouldn’t prices rise? N.C. State University economist Mike Walden answers.
“Well, most people would say the answer to your question … is yes, particularly if a merger means less competition in the market, therefore, people don’t have as many choices and a company sort of has you around the neck and they can increase prices.
“But what economists also point out is that oftentimes mergers mean good things, particularly if it allows the new bigger company to take advantage of efficiencies (and) economies of scale, so their cost structure will be lower, and they can pass on those cost savings in the form of lower prices.
“We have a new study … that really tested these alternative views of mergers when it looked at the 2008 merger between Miller beer and Coors beer. And there was a lot of concern there about what this would do to beer prices, et cetera.
“What the study found … was that, initially, beer prices did go up, … meaning that the fact that there was less competition because these two giants merge probably did mean that the prices were going to go on the upside. But what the study found was that, over time, those price increases actually moderated and prices actually went down a little bit, and the reason being that now this bigger company could take advantage of production efficiencies — that over time, those production efficiencies kicked them.
“I think the bottom line here … is, we should give these mergers time to work out. We may initially see an increase in prices, but over the long run, that trend may shift.”
Category: Economic Perspective