Conglomerate mergers, mutual forbearance behavior and price competition

Abstract

Abstract This paper tests the hypothesis that conglomerate mergers lessen price competition through the creation of mutual forbearance behavior. This hypothesis is tested by estimating the impact of multi‐market contacts on price competition in manufacturing industries. Potential interfirm contacts are computed for 195 of the top 200 American manufacturers in 1963. Measures of multi‐market contacts are then constructed and introduced as additional explanatory variables in a three‐equation model of the determinants of industry price‐cost margins. The empirical results do not support the mutual forbearance hypothesis, and suggest that conglomerate mergers should not be proscribed on that basis.