• A merger brings previously independent firms under common ownership.

• An acquisition transfers control of a firm, business or collection of assets to a buyer.

• The collective label mergers and acquisitions (M&A) covers both forms of transaction.

• Coles–Myer created a large diversified retail group in 1985; its later unwinding illustrates the difficulty of sustaining conglomerate synergies.

• Google–YouTube combined a fast-growing video network with Google's search, advertising and technical infrastructure.

• Facebook–Instagram and Facebook–WhatsApp placed major emerging social and messaging platforms inside Facebook's ecosystem.

• Disney–21st Century Fox expanded Disney's content portfolio and accelerated its streaming strategy.

• Microsoft–Activision Blizzard - more on this later on.

• The ACCC opposed Qantas–Alliance Airlines because Alliance was an important rival in charter air transport for resource-industry customers.

• The ACCC opposed the proposed acquisition of Kmart and Officeworks by Woolworths; the principal concerns arose from the Kmart overlaps.

• Nvidia–Arm was abandoned after competition authorities raised concerns about rivals' access to Arm technology, sensitive information and future innovation.

• Cost synergies reduce fixed or marginal cost through economies of scale or scope, lower-cost plants, shared systems or removal of duplication.

• Complementary assets become more productive together: technology and distribution, brands and geographic reach, or data combined with expertise or infrastructure.

• Corporate control can replace bad management, redeploy underused assets or change investment discipline.

• Market power can raise private profit by weakening a competitive constraint, increasing bargaining power or making coordination easier.

• Managerial incentives can favour larger organisations through prestige, influence, compensation or job security.

• Hubris can lead managers to overestimate synergies and underestimate integration costs.

• Strategic and financial motives include:

  • different valuations of the target;

  • access to finance or highly valued shares;

  • defensive acquisition when rivals are consolidating;

  • an expectation that the buyer can manage the assets more effectively.

• The Australian Competition and Consumer Commission (ACCC) assesses acquisitions for their likely effect on competition.

• Since 1 January 2026, Australia has a mandatory notification regime: acquisitions meeting the applicable requirements must be notified, subject to exemptions and notification waivers.

• The main thresholds use Australian revenue and transaction value (approx. $200 million / $500 million); a sequence of smaller acquisitions can also trigger notification.

• The regime is suspensory: parties must wait until approval takes effect before completing a notified acquisition.

• Phase 1 is the initial review. Acquisitions requiring further investigation move to an in-depth Phase 2.

• ACCC Decisions can be challenged in the Australian Competition Tribunal.

• Authorities can clear a merger, require remedies that address competition concerns (such as selling an overlapping business), or challenge or prohibit it.

Internationally, OECD CompStats records about 91,000 merger decisions across 59 jurisdictions during 2015–2024:

1. Market definition: Which products and geographic areas form the relevant market?

2. Concentration: How much would the merger change market shares and concentration?

3. Counterfactual: How would competition develop without the merger?

4. Competitive effects: Would losing an independent competitor increase prices, reduce quality or innovation, or make coordination easier?

5. Remaining competitive constraints: Could rivals expand, new firms enter, or powerful buyers constrain the merged firm?

6. Efficiencies: Could the merger lower costs or improve products, and would consumers benefit?

• Market definition identifies the product group and geographic area within which the effects on competition are assessed.

• In Australian law, a market includes goods or services that are “substitutable for, or otherwise competitive with” those under assessment (Competition and Consumer Act 2010 (Cth), s. 4E).

• Market definition has a major effect on the estimation of market shares and concentration.

• Begin with a narrow plausible candidate market.

• Treat every product and location inside the candidate as controlled by one hypothetical monopolist.

• Apply a small but significant and non-transitory increase in price (SSNIP), commonly 5 per cent.

• Under the HMT, the market is the smallest set of products for which a hypothetical monopolist could profitably impose a SSNIP.

• Compare:

  • the higher margin on retained sales;

  • the lost margin when customers switch outside the candidate.

• A profitable SSNIP means the candidate passes the test.

• Otherwise, add the closest outside substitute and repeat the analysis.

• A firm's market share is its sales as a percentage of total sales in the relevant market.

• We can calculate shares using sales revenue or units sold, using the same measure for all firms.

• Looking at the shares of all firms is a common way to assess market concentration: the extent to which sales are accounted for by a small number of firms.

• A market where a few firms account for most sales is more concentrated than one where sales are spread across many similarly sized firms.

• Market definition is vital: the products and geographic areas included determine which sales and firms we count, and hence the shares and concentration we measure.

• HHI identifies transactions that warrant closer analysis.

• Two markets with the same HHI can behave differently because of:

  • product differentiation and diversion;

  • capacity constraints and cost asymmetries;

  • entry conditions and buyer responses;

  • innovation and future products;

  • the competitive role of a small maverick.

• A high share can coexist with weak market power when substitution and entry are strong.

• A small-share firm can still be important when it is a close competitor, a maverick or a likely future entrant.

• Before a horizontal merger, each party constrains the other:

  • a price increase can divert customers to the other party;

  • an output reduction can be offset by the other party's expansion;

  • weaker quality or service can cause switching.

• After the merger, the common owner internalises the effect of each firm's decisions on the other firm's profit.

• A unilateral effect is a change in conduct that the merged firm finds profitable through its own changed incentives.

Answer: 1.

• Before the merger, customers who leave A for B generate profit for a rival.

• After the merger, some lost A sales become profitable B sales for the same owner.

• The common owner internalises this gain in B's profit when setting A's price.

• Greater diversion from A to B and a larger margin on B make the incentive stronger. Market shares answer different questions about market structure.

Extra output by one merging firm lowers the price received on the other firm's sales. Common ownership therefore encourages the merging firms to reduce their combined output. The final effect on price also depends on how their rivals respond.

We will derive equilibrium output and price in the Cournot model, then compare the outcomes before and after a merger.

• There are N\geq 2 independent firms selling an identical product.

• Firms choose quantities simultaneously; demand is P=A-BQ, with B>0.

• Each firm has constant marginal cost c<A.

• Costs stay unchanged after the merger, with no entry or capacity constraints.

• The merged firm reduces its combined output: q^{\mathrm{post}}<2q^{\mathrm{pre}}.

• If outsiders remain, each expands: q^{\mathrm{post}}>q^{\mathrm{pre}}.

• This expansion replaces part of the merging firms' output reduction. Total output still falls, so the market price rises.

• Consumers face a higher price and buy less, reducing consumer surplus.

In the applied session, we will calculate these changes for a merger between two of three firms.

The Cournot merger paradox is that a merger can reduce the merging parties' combined profit, even as the market price rises.

• The relevant comparison is the merged firm's profit against the combined pre-merger profit of both parties.

• Any remaining outsiders benefit from the output contraction, expanding and earning more.

In the applied session, we will derive the merger paradox in the three-to-two firm merger.

A merger needs a private rationale. Cost savings, capacity advantages, product differentiation or a larger coalition can change the result.

• A marginal-cost saving lowers the cost of an additional unit and directly affects price or output incentives. Pass-through determines how much reaches customers.

• A fixed-cost saving raises profit while leaving marginal cost unchanged. Price effects arise through entry, exit, investment or innovation over time.

• Quality and innovation efficiencies can increase willingness to pay, reduce effective price or accelerate new products.

• ACCC gives greatest weight to likely, verifiable, timely efficiencies that require the merger and benefit customers in the affected market.

In the applied session, we will return to the three-firm example and allow the merger to lower the merged firm's marginal cost.

We will see that:

• lower marginal cost encourages the merged firm to expand output, counteracting its incentive to restrict supply;

• a sufficiently large saving can restore the original three-firm price and total output;

• at that point, consumers are as well off as before, while producing the same output with fewer resources raises total surplus;

• a smaller saving offsets only part of the price increase in this example, a larger cost saving leads to welfare benefits from merger.

• Product characteristics, quality, location, brand and customer group shape substitution.

• A price increase for one product can send different proportions of lost sales to different alternatives (diversion).

• Products with similar attributes generally have higher diversion between them.

• A merger between close substitutes removes a stronger constraint than a merger between distant substitutes.

• Looking at current market shares alone can miss this product-level closeness.

• A high D_{ij} means product j is a common next choice for customers leaving product i.

• A ratio close to one indicates very close substitution; a ratio close to zero indicates little direct substitution.

• Before the merger, the risk of switching to j constrains product i's price, quality and service.

• After an i–j merger, the common owner recaptures the sales that move from i to j.

• A small-share product can therefore impose a strong constraint when it receives a large share of another product's lost sales.

Mergers can change product variety in two ways.

• First, a merged firm may choose to retire a product (e.g., when its incremental profit does not justify its fixed cost). This can leave some consumers with a poorer match.

• Second, a merged firm may change the types of products offered.

  • Before the merger, A may become more like B to attract B's customers.

  • After the merger, the common owner internalises cannibalisation: the loss of B's sales or profit when A attracts its customers.

  • This can encourage the firm to give retained products less similar characteristics and appeal to different consumer groups.

In the Microsoft/Activision example, how might a merger affect the offering of Halo and Call of Duty?

• Unilateral effects ask how the merged firm's own optimal conduct changes.

• Coordinated effects ask whether the merger makes coordination among firms more likely, complete or sustainable.

• Coordination can concern price, customers, territories, service, investment, capacity or innovation.

• A merger can affect:

  • the payoff from adhering to a common understanding;

  • the short-run gain from deviation;

  • the severity of punishment;

  • the ability to detect deviations.

A maverick firm is an aggressive competitor whose pricing, expansion or innovation disrupts coordination.

• It may refuse to follow rivals' price increases, forcing them to compete harder. Its influence can exceed what its market share suggests.

• A merger that weakens this behaviour can make coordination easier to sustain.

• Higher prices after a merger can make entry by new firms, or expansion by existing rivals, more profitable.

• Competition authorities need credible evidence that entry will be:

  • Likely: commercially viable and feasible, allowing for costs and risk;

  • Timely: fast enough to prevent or counteract the merger's competitive harm;

  • Sufficient: able to compete on the scale and in the products needed to replace the lost constraint.

• Assess practical evidence: entry costs, access to finance and key inputs, approvals, capacity, customer switching and past entry experience.

• Forecast profits after entry, allowing for how incumbents adjust prices and output. A temporarily high post-merger price may fall once entry occurs.

• Often, claims of future entry are looked on critically: if the merging firms expect entry to restore competition, where do they expect the gains from merging to come from?

1. Why do mergers cluster within industries and periods? (Merger waves)

2. How do the effects of repeated acquisitions by one buyer accumulate? (Serial acquisitions)

3. How can an acquisition change the development of products that do not yet exist? (Killer acquisitions)

• A merger wave is a period in which merger activity rises and transactions cluster across industries or within a particular industry.

• Some examples include:

  • horizontal industrial consolidation around the turn of the twentieth century;

  • conglomerate expansion during the 1960s;

  • debt-financed takeovers during the 1980s;

  • globalisation- and technology-related megadeals around 2000;

  • recent acquisition activity involving technology, data and investment funds.

• Industry shocks: Changes in technology, regulation, trade, demand or input costs can alter efficient scale and the value of combining assets. Many firms face these changes at the same time.

• Financing and valuation: Available credit makes more acquisitions feasible, and highly valued shares can be used to pay for them. Different beliefs about future asset values can also create opportunities for trade.

• Strategic responses: An initial merger can change the profitability of later deals. Rivals may seek matching scale or complementary assets, or acquire another firm to avoid becoming a takeover target.

• Serial acquisitions are a sequence of acquisitions made by the same buyer.

• Cumulative effects are the combined competitive effects of that sequence relative to the likely path without it.

A firm begins with a 20 per cent share and sequentially acquires four firms, each with a 5 per cent share. Assume all firms operate in the same market and all other shares remain fixed.

Calculate:

1. the acquirer's share before and after each transaction;

2. the HHI increment from each acquisition;

3. the cumulative HHI increase, checking it directly using the initial and final ownership shares;

4. whether successive acquisitions create equal HHI increments, and why.

• Current shares may understate targets with valuable capacity, sites, technology, licences or expansion plans.

• Earlier acquisitions can alter the market total, future entry and the counterfactual shares used for later transactions.

• In Australia, qualifying target revenue from acquisitions during the preceding three years can be aggregated for the notification thresholds.

• A sequence of individually modest transactions can therefore create a compulsory notification obligation.

• The relevant counterfactual is the likely market path without the sequence, rather than the market immediately before the final acquisition.

• Potential competition is the constraint exerted by a firm that may enter or expand.

• An actual potential competitor is likely to enter or expand in the counterfactual.

• A perceived potential competitor constrains current conduct because incumbents anticipate possible entry.

• A killer acquisition occurs when an incumbent acquires a rival firm or project and discontinues, delays or scales back development to avoid competition with existing products.

Examples raising this concern

• Questcor/Synacthen (2013): Acquired US rights to a potential rival to its Acthar drug. The FTC alleged that this prevented rival development; the case settled in 2017.

• Facebook/Giphy (2020): Giphy's advertising service was closed after acquisition. The CMA found a loss of potential advertising competition and ordered divestment in 2022.

A target with zero current share can still be a significant future constraint. HHI may record no merger increment.

1. Specify the likely future without the merger.

2. Identify the current or future competitive constraint placed under common control.

3. Choose a model that matches the market's competitive process.

4. Derive how common ownership changes incentives.

5. Predict the merged firm's conduct and rivals' equilibrium responses.

6. Incorporate merger-specific efficiencies and product changes.

7. Assess entry, expansion, repositioning and coordination.

8. Compare price, output, quality, innovation, consumer surplus and total surplus across the two futures.

• Common ownership makes firms internalise how their prices, quantities and product choices affect one another's profits.

• Removing a close competitor strengthens the incentive to raise prices or reduce output, all else equal.

• Marginal-cost savings make extra output more profitable and can offset the loss of rivalry.

• Rivals' expansion or entry can limit price increases. Their responses can also make a merger unprofitable for the merging firms.

• A merger can make coordination easier by changing the payoffs from cooperation, deviation and punishment, especially when it removes a maverick.

• Common ownership changes product and innovation incentives: it can support better products, while protecting existing profits can encourage product withdrawal or cancellation of competing projects.

• A profitable merger can harm consumers. Total welfare also depends on resource savings, product variety, quality and future innovation.

The result uses several assumptions:

• firms choose quantities;

• products are homogeneous and sell at one market price;

• each firm treats rivals' quantities as fixed;

• the relevant demand elasticity is well defined at the equilibrium;

• market shares reflect firms' output choices.

Product differentiation, capacity constraints, asymmetric costs, entry and innovation can make markets with the same HHI behave differently.

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