Merger-Induced Welfare Gains in the Presence of Environmental Externality and Product Differentiation

This chapter examines the role of higher product differentiation on a merger-induced welfare gain when firms are regulated for their pollution through an emission tax. We define welfare as the sum of industry profits and consumer surplus and find that a higher degree of product differentiation increases the gap between post- and pre-merger welfare thereby increasing the merger-induced welfare gain. The welfare gain is caused by (1) higher market power and profits created by product differentiation, (2) the ability to reduce pollution intensities as firms differentiate their products using cleaner or green production technologies that leads to tax cost savings, and (3) higher rates of decrease in pollution intensities by merging firms post-merger relative to pre-merger and non-merging firms.