concentrated markets on this ground. For instance, Japan’s Ministry of Economy, Trade, and Industry (METI) published “The Industrial Structure Vision 2010” and called for “conversion to corporate merger review that considers the medium- to long-term and the global market” $ ^{2} $ . Implicitly, they called for a merger review with more emphasis put on “the medium- to long-term” effects of mergers that presumably arise from efficiency improvements and intensification of competition in the innovation market than the supposedly short-term effect of reduced competition in the product market.

Williamson’s analysis is flawed in that all the firms, both merging firms and their rivals, are assumed to decrease the marginal cost. Of course, it is usually merging firms only that can achieve efficiency gains (if any) through mergers and, even if there is some spillover to other firms, it is far from perfect. The other flaw of Williamson’s is its lack of explicit analysis of oligopoly market equilibrium.

Analyzing mergers in a Cournot oligopoly of homogeneous goods, Salant, et al. (1983) showed that, with unchanged cost conditions, a merger causes the decline of combined profits of merging firms while increasing the profits of other firms -- a proposition often called ‘merger paradox’. Farrell and Shapiro (1990) showed that, even if the marginal cost decreases sufficiently so that the profits of merging firms increase, the equilibrium price increases, thereby hurting consumers’ surplus, unless the cost reduction is even more significant.

The Merger Guidelines in Japan, as in the US, requires that, for the efficiency improvements to be considered, “improvements in efficiency contribute to the interests of users” suggesting that the price needs to be reduced. These discussions together imply that, if a merger fails to raise the merging firms’ profits, the efficiency improvements must be limited and the price must increase, hence failing to satisfy the Guidelines’ condition.

This consideration explains why, in Section 3, we will compare the post-merger profitability of firms to that of control firms. And the result that, in the majority of cases, the merging firms’ profits failed to show significant improvement, suggests that the efficiency gain must have been insufficient to improve consumer welfare.

But, how about the so-called long-term consequences? We will analyze these in two ways. First, in Section 4, we will analyze the behavior of share prices using the event-study methodology. The Modigliani-Miller Theorem indicates that a firm's share price is determined in the stock market so that its market value (total share value plus debts) equals the present value of its future profit stream. Therefore, even if the profits decline in the short-term, the share price should rise with the announcement of the merger if the investors anticipate the profits to increase in the long run. We will find that, even though the shareholders' cumulative abnormal returns (CAR) tend to be positive on the very day of merger announcement, they become insignificant in a few days in the majority of cases, hinting that the investors are by no means optimistic about the merging firms' future profitability.

Second, in Section 5, we will investigate post-merger changes in R&D intensity (i.e., R&D expenditures as a ratio to sales) and the number of patent applications, because it is often argued that the merger contributes to more active and efficient R&D activities, leading to long-term growth. Again we will find very limited evidence to support this