Horizontal mergers, efficiency gains and remedies

The combination of structural remedies and efficiency gains in a merger may lead to pro-competitive outcomes, thus maintaining pre-merger prices. Two types of efficiencies are necessary. The first corresponds to a flatter marginal cost function, the second to a decrease in the intercept of the marginal cost curve. If these efficiency gains are not sufficient to keep the post-merger price at the pre-merger level, then divestitures by the resultant merged entity are adopted. This paper allows a comparison between two kinds of divestitures and it can be shown that, depending on the efficiency gains, divested capital distributed among the remaining competitors in the market is optimal when compared to divested capital being placed on the hands of a single competitor.