Horizontal Mergers between Asymmetric Low-Carbon Manufacturers

Abstract

Mergers have become an important means for low-carbon manufacturers to improve their efficiency and competitiveness. This paper studies the impact of horizontal mergers between asymmetric low-carbon manufacturers on product diversity, profits, consumer surplus, and the environment. In the premerger model, we consider two asymmetric manufacturers in terms of market potential that produce two products and compete on prices and carbon emissions. In the postmerger model, the two asymmetric manufacturers merge into one firm. The merged manufacturer can either continue to produce two products and collude on both products’ prices and carbon emissions or enjoy both production and green technology investment cost savings to produce only one product. Our result suggests that when the merged manufacturer produces two products, the merger does not necessarily lead to higher prices, which stands in sharp contrast to the conventional wisdom. Furthermore, the merger always benefits the manufacturer but harms consumers. When the merged manufacturer chooses to produce only one product, however, we confirm that the merger can lead to a win-win-win outcome, i.e., the manufacturer, customers, and environment all become better off if either the production or investment savings are salient. The conventional wisdom shows that salient costing savings lead to price reduction. Nevertheless, we show that the merged manufacturer can charge consumers higher prices to provide lower-emission products. In addition, we show that improving investment (production) cost savings is more effective for the merged manufacturer if these two cost savings are salient (not salient). Finally, the merged manufacturer should not reduce diversity if these two cost savings are relatively low because the profit and consumer surplus may be simultaneously lower. We also extend our base model to the case where there exist three manufacturers in the premerger model and the merged firm still operates in a competitive market.

Keywords

Game theory / asymmetric horizontal merger / low-carbon manufacturing / price and emission collusions / production and investment cost synergies

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