February 5, 2021, 15:30–17:30
Competition Policy Seminar
Merger of firms with overlapping market activities reduces price competition that typically raise prices and producers' profits at the expense of immediate consumer welfare but the benefit on long term innovation in markets such as pharmaceuticals. The total welfare trade-off thus depends crucially on the net static benefit of mergers for firms that also depends on promotional spending decisions and not only on price. When firms compete not only in price but also in advertising, a merger can lead to higher prices but also to lower advertising, especially for the very substitute products owned by merging firms. We study mergers in the pharmaceutical industry showing some reduced form results on the effect of mergers on both prices and promotional spending. We show that prices indeed can increase but that advertising spending can also decrease, which can be seen in some cases as reduced wasteful spending of business stealing promotion. Then, studying the case of the merger between Pfizer and Wyeth who overlapped on an antimicrobial drug market, we estimate a structural model of demand and supply with firms competing in prices and advertising. We use the structural model to simulate the counterfactual price equilibrium absent the merger. We find that the counterfactual simulation of the merger effect on prices is much smaller absent advertising than when we take into account the equilibrium advertising decisions of firms. This shows that the price increase observed after the Pfizer-Wyeth merger for their own products (Zyvox and Tygacil) is due not only to the merger but also to the fact that advertising was drastically reduced after the merger. Competition policy balancing short and long term effects on innovating firms’ profits should consider also how mergers affect promotion strategies in addition to price competition.