Are big mergers welfare enhancing when there is environmental externality?

Abstract

Previous studies find that horizontal merger deals that consolidate a majority of firms in the market are likely to reduce welfare. This study provides an in-depth analysis of the relationship between the size of a merger and welfare in industries with environmental externality. In an international framework we show that in a market where more than 50% of firms have merged, a further increase in the size of the merger could increase or decrease welfare depending on two previously unexplored factors: (i) a given threshold of size of a merger and (ii) the pollution intensity of firms. Furthermore, we show that the relationship between welfare and size of merger can be affected by an exogenous change in emission tax at home and in a foreign country.