Merging companies may become cheaper and more efficient to operate, but those savings do not necessarily translate into lower prices for consumers, according to new research. In some cases, shoppers may even end up paying more after a merger, suggesting that greater corporate efficiency does not automatically produce benefits for customers.

The study examined the 2019 merger of the consumer healthcare businesses of pharmaceutical giants GSK and Pfizer. Researchers from Loughborough University, the University of East Anglia (UEA), the Philippine Competition Commission, the University of the Philippines and E.CA Economics analysed how the deal affected the market. Their findings were published in the Southern Economic Journal.

Researchers focused on prices for over-the-counter cough and cold medicines in the Philippines before and after the merger. GSK and Pfizer had predicted that combining their consumer healthcare operations would eventually generate annual savings of around £500 million. The researchers found evidence that the merger did create genuine efficiencies, particularly for products previously supplied by Pfizer.

The estimated cost of supplying Pfizer products fell by 9.43% following the merger, while their prices declined by 6.57%. However, the benefits were not seen across the entire market. GSK product prices increased by an estimated 3.25%, while Sanofi, a major international competitor, raised its prices by 8.55%. Prices from lower-cost local manufacturer Unilab remained broadly unchanged.

Lead author Professor Farasat Bokhari of Loughborough University explained that companies seeking approval for mergers often argue that combining their operations will create efficiencies. A larger company, for example, may be able to manufacture, distribute or sell products at a lower cost. These savings can potentially offset some of the negative effects caused by reducing the number of competing businesses in a market.

However, the researchers said the findings demonstrate that the relationship between efficiency and consumer prices can be more complicated. Professor Sean Ennis of UEA’s Norwich Business School said the study confirmed efficiencies for one of the merging companies, an area that has not been widely studied. Still, those efficiencies ultimately did not produce lower prices across all products in the market.

The researchers also found evidence consistent with greater coordination between GSK/Pfizer and Sanofi following the merger. Bokhari stressed that this does not mean the companies explicitly agreed to set prices. Instead, when fewer independent competitors remain in a market, companies may find it easier to coordinate their pricing behaviour without making an explicit agreement, potentially resulting in higher prices than would be expected under stronger competition.

The findings could have important implications for competition authorities considering future mergers between large companies. The researchers argue that regulators should examine more than whether a proposed merger can reduce operating costs or create efficiencies. They should also assess whether reduced competition could make coordination between remaining companies more likely, potentially preventing cost savings from reaching consumers or even contributing to higher prices.

More information: Farasat Bokhari et al, Merger Efficiency and Coordinated Effects: Nothing to Sneeze at? Evidence From Cough and Cold Medicines in the Philippines, Southern Economic Journal. DOI: 10.1002/soej.70063

Journal information: Southern Economic Journal Provided by University of East Anglia