Company mergers can cut costs without cutting prices for consumers, study finds

Company mergers can reduce operational costs without lowering prices for consumers, according to new research examining the impact of the 2019 merger between GlaxoSmithKline (GSK) and Pfizer’s consumer health care divisions. The study, published in the Southern Economic Journal, analyzed changes in pricing for over-the-counter cough and cold medications in the Philippines following the consolidation of the two global pharmaceutical giants. The research was conducted by academics from Loughborough University, the University of East Anglia (UEA), the Philippine Competition Commission, the University of the Philippines, and E.CA Economics, a subsidiary of the Berkeley Research Group based in London. It focused on how the merged entity’s efficiency gains affected market dynamics and consumer prices. Researchers found that while some cost reductions were realized, these benefits did not translate into widespread price cuts for all products. Instead, prices for certain brands rose, particularly among major international players. Before the merger, GSK and Pfizer had projected annual cost savings of approximately £500 million through streamlined operations. The study revealed that the merged entity achieved some of these savings. For instance, the estimated cost of supplying Pfizer products decreased by 9.43%, and their prices fell by 6.57%. However, the same efficiency gains were not reflected in all product lines. GSK’s prices increased by an estimated 3.25%, while Sanofi, another major competitor, raised its prices by 8.55%. Prices from a local manufacturer, Unilab, remained largely stable. The researchers noted that the merger appeared to facilitate greater coordination between GSK/Pfizer and Sanofi. While there was no explicit agreement on pricing, the reduced number of independent competitors created conditions that allowed for tacit collusion. This, in turn, led to higher prices than would be expected in a competitive market. Lead author Professor Farasat Bokhari explained that such coordination is often difficult to detect but can significantly influence market outcomes. The findings challenge the common assumption that mergers always benefit consumers through lower prices. Instead, they highlight the potential for mergers to enhance corporate efficiency without necessarily improving consumer welfare. The study underscores the importance of considering both efficiency gains and the likelihood of coordinated behavior when evaluating proposed mergers. Professor Sean Ennis, co-author of the study from UEA’s Norwich Business School, emphasized that while the research confirms efficiency improvements for one of the merging firms, these did not result in universal price reductions. He added that the study contributes to a growing body of literature exploring the complex relationship between mergers, market power, and consumer prices. The research has broader implications for regulatory bodies responsible for reviewing mergers. It suggests that competition authorities should not solely focus on efficiency arguments but must also assess whether a merger increases the risk of anti-competitive practices. The study provides empirical evidence that even when mergers yield cost savings, they can still lead to higher prices due to reduced market competition and enhanced coordination among remaining firms. As the debate over antitrust regulation continues, this research adds a critical dimension to understanding the long-term effects of corporate consolidations. It serves as a reminder that the economic benefits of mergers may not always align with consumer interests, necessitating a more nuanced approach to regulatory oversight.