Merger Efficiencies, Pro and Con

By Alan Greenspan

Evidence concerning the effects of mergers on economic efficiency is mixed. While some studies find no evidence of profit and efficiency improvements following mergers, others indicate that, on average, mergers have led to significant productivity gains.

In the banking industry, the data suggest that while some mergers have engendered improved operations, others have not. Thus, there are no clear-cut findings that suggest bank mergers uniformly lead to efficiency gains. However, the evidence suggests that there are considerable differences in the cost efficiencies of banks within all bank size classes, implying that there is substantial potential for many banks to improve the efficiency of their operations, perhaps through mergers.

Numerous empirical studies, nonetheless, have found a statistically significant positive relationship between market concentration and profits which, upon closer examination, appears to derive from a link between market share and profits. Economists have differed in their interpretations of this finding. While one group argues that high levels of concentration allow firms to exercise market power, resulting in above normal profitability, another group argues that high concentration levels and high profits are both the consequence of greater efficiency.

Studies of the relationship between concentration and prices tend to support the market power interpretation, but the magnitudes of the positive, statistically significant coefficients relating prices to concentration measures tend to be fairly small. Some empirical studies also suggest that high concentration and presumed lack of competitive pressure may also be associated with the failure of firms to produce efficiently.

More generally, it is concern over the lack of the leveling force of competition in highly concentrated markets that has fostered the fear of bigness. But, unless a relationship between bigness and market concentration can be more firmly rooted in anticompetitive behavior, bigness, per se, does not appear to be an issue for national economic policy. Rather, it appears that bigness should be primarily the concern of shareholders whose returns could be muted by large company inefficiencies, and their customers who may face bureaucratic inflexibility.

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