The Welfare Consequences of Mergers with Endogenous Product Choice∗

Merger simulations focus on the price changes that may occur once previously independent competitors set prices jointly and other market participants respond. This paper considers an additional effect – the possibility that market participants choose to change their product offerings after a merger. Using a model that endogenizes both product choice and pricing, we conduct equilibrium market simulations for mergers including the potential for offering changes in a variety of scenarios. We find that allowing for changes in product offering can have effects on profitability and consumer welfare above and beyond those generated by traditional price responses alone, particularly in cases where the merging parties offered relatively similar products prior to the merger. Cost synergies may also affect product offering decisions, potentially leading to increases in consumer welfare if more products are introduced. The results suggest that analysts carefully consider the impacts of product choice, along with prices, when simulating potential welfare changes associated with mergers.