Do Cartel Breakdowns Induce Mergers? Evidence From EC Cartel Cases

Cartel agreements between firms typically aim at reducing competition and increasing joint profits. Due to the fact that such agreements regularly cause substantial economic harm in the form of, e.g., elevated prices and reduced innovation activities, cartels are a major infringement of competition laws in most countries around the world. After the breakdown of cartels, anecdotal evidence often points towards an increased merger activity in the respective industries thereby raising the question whether mergers must be considered as a potential 'second-best' alternative to cartels.

Against this background, we investigate the impact of cartel breakdowns on merger activity. Merging information on cartel cases decided by the European Commission (EC) between 2000 and 2011 with a detailed data set of worldwide merger activity, we find that, first, the average number of all merger transactions increase by up to 51 percent when comparing the three years before the cartel breakdowns with the three years afterwards. Second, for the subset of horizontal mergers, merger activity is found to increase even more – by up to 83 percent – after the cartel breakdowns. Our results not only suggest that competition authorities should consider mergers as potential 'second-best' alternative to cartels but also imply that resource (re)allocations in competition authorities, law practices and economic consultancies may become necessary to handle the increase in merger cases.

Hüschelrath, Kai and Florian Smuda (2013), Do Cartel Breakdowns Induce Mergers? Evidence From EC Cartel Cases, ZEW Discussion Paper No. 13-036, Mannheim.