Review of Industrial Organization 18: 327–336, 2001.
© 2001 Kluwer Academic Publishers. Printed in the Netherlands.
The Gradual Response of Market Power to Mergers
in the U.S. Steel Industry
CRAIG A. GALLET
Department of Economics, California State University at Bakersﬁeld, 9001 Stockdale Highway,
Bakersﬁeld, CA 93311-1009, U.S.A.
Abstract. Studies of the impact of horizontal mergers on market power typically impose an imme-
diate adjustment of market power following a merger. This paper adopts an alternative procedure to
estimate the effect of four mergers on market power in the U.S. steel industry. Namely, by estimating
a switching regression model that incorporates proﬁt-maximizing behavior, the results show that
mergers generally increased market power in the steel industry. However, it did take some time for
market power to fully adjust after each merger.
Key words: Gradual adjustment, market power, mergers, steel.
Understanding the impact of horizontal mergers on market power is critical to the
efﬁcacy of antitrust policy. Recent attempts to estimate this relationship rely on
stock and/or output price movements. For example, utilizing a series of dummy
variables, Prager (1992) ﬁnds abnormal stock returns in the railroad industry imme-
diately following key merger events. This is inferred to be consistent with the view
that mergers increase market power.
Alternatively, since market power enhancing
mergers lead to a greater ability to elevate price over marginal cost, ceteris paribus,
evidence of post-merger increases in output prices in the airline (e.g., Kim and
Singel (1993)) and hospital (e.g., Keeler et al. (1999)) industries, amongst others,
also lends support to the idea that horizontal mergers increase market power.
Since these studies impose a full adjustment of prices immediately following
a merger, the impact of a merger on market power is assumed to be contempor-
aneous. Under several plausible scenarios, however, it may take time for market
power to change after a merger. Indeed, this paper uses an empirical model to show
The author greatly appreciates the helpful comments of Todd Cherry, Catherine Co, John
Schroeter, William G. Shepherd, and an anonymous referee.
The argument being that if mergers increase the likelihood of cooperation, and therefore beneﬁt
all ﬁrms in an industry, events supporting a merger (such as a merger announcement or a court’s
ruling in favor of a merger) will increase the stock prices of the merging ﬁrms, as well as the stock
prices of rival ﬁrms.