Merger and Regulatory Incentives

This paper examines the incentives for two-product price-regulated firms to cross-subsidize when there are no economies or diseconomies of scope. If the two products are Substitutes and each product faces a separate regulatory constraint, after merger the product with the looser initial constraint is favored relative to a regulated, single-product firm. Under a joint constraint, the more tightly regulated product is emphasized. This paper takes as an example a merger between two firms featuring Averch-Johnson behavior. While, in general, merger encourages reductions in joint output, with separate regulatory constraints, the merged firm produces relatively more of the good with a smaller initial degree of overcapitalization.