Heterogeneous Merger Effects on Competitive Outcomes

Empirical merger studies frequently account for premerger ﬁrm heterogeneities which, if ignored, can cause selection bias. In contrast, postmerger ﬁrm heterogeneities are widely ignored in merger studies even though econometric treatment studies have shown doing so can result in biased parameter estimates. This study emphasizes the relevance of considering postmerger heterogeneities when evaluating competitive merger outcomes. Based on a comprehensive dataset on the static random access memory industry, we provide evidence for substantial postmerger heterogeneities aﬀecting the impact of mergers on competitive outcomes. We ﬁnd that ﬁrms’ postmerger output further increases (and postmerger price further declines) if merging ﬁrms are more eﬃcient, operate in more elastic product markets, are more innovative, and acquire knowledge in technological areas that are relatively unexplored to themselves. A further interesting insight is that product market characteristics cause stronger postmerger outcome heterogeneities than do technology market characteristics. We also ﬁnd that the postmerger eﬀects accounting for heterogeneities diﬀer greatly from those that consider invariant or homogeneous postmerger outcome eﬀects. JEL: Our study builds on a comprehensive database that contains detailed ﬁrm-level information on mergers, shipments, and patents in the static random access memory market. To consider pre- and postmerger heterogeneity, i.e., nonuniformity in response to merger choices, we build on a random coeﬃcient or heterogeneous treatment eﬀects model as suggested by Heckman et al. (2006) and Cerulli (2012). Our estimation results conﬁrm that pre- and postmerger ﬁrm heterogeneities play an important role in assessing the competitive impacts of mergers. We ﬁnd substantial postmerger heterogeneities aﬀecting the impact of mergers on competitive outcomes. Our results provide evidence that ﬁrms’ postmerger output further increases (and postmerger price further declines) if merging ﬁrms are more eﬃcient, operate in more elastic product are more innovative, and acquire knowledge in technological areas that are relatively unexplored to themselves. We ﬁnd that product market characteristics have a much stronger impact on heterogeneous postmerger outcome eﬀects than do technological characteristics. Our estimation results also conﬁrm that postmerger eﬀects accounting for heterogeneities diﬀer greatly from those that consider invariant or homogeneous postmerger outcome eﬀects Our results also show that premerger ﬁrm heterogeneities are important for describing ﬁrms’ merger incentives. More speciﬁcally, ﬁrm-pairs that are located in the same region, operate by more inelastic demands, have more similar marginal costs, are more eﬃcient, are more innovative, and operate in less related technological areas have higher incentives to merge. acteristics. We have also shown that the postmerger eﬀects accounting for heterogeneities diﬀer greatly from those that do not account for postmerger heterogeneities and treat outcome eﬀects equal among ﬁrms. Our estimation results provide evidence that ignoring heterogeneous outcome eﬀects can result in heterogeneity bias, just as ignoring premerger heterogeneities can lead to selectivity bias. We performed several robustness checks and can conﬁrm that our results are robust to selecting diﬀerent sets of instruments. More work is required in evaluating postmerger heterogeneities in diﬀerent industries. It would be interesting to know if our result -postmerger heterogeneities are more determined by product market characteristics than by technological characteristics - also applies to other industries.