Horizontal mergers, involuntary unemployment, and welfare

Standard welfare analysis of horizontal mergers usually refers to two effects: the anticompetitive market power effect reduces wel-fare by enabling firms to charge prices above marginal costs, where-as the procompetitive efficiency effect increases welfare by reduc-ing the costs of production (synergies). However, well-accepted demand-side effects of synergies (income feedback effects, `Ford ef-fects`) are usually neglected in this literature. We introduce them into a standard oligopoly model of horizontal merger by assuming an (empirically supported) decrease in labour demand due to merg-er-specific synergies and derive welfare effects. We find that effi-ciency benefits from horizontal mergers are substantially decreased, if involuntary unemployment exists. However, in full employment economies, demand-side effects remain negligible. Eventually, poli-cy conclusions for merger control are discussed.