Merger Review Under Asymmetric Information

ABSTRACT When the antitrust authority has imperfect information about firms' costs, we show that all firms (including firms not participating in a merger) can influence the antitrust authority's merger decision by manipulating Pre‐merger quantities. We find that there exists a clear relationship between the level of synergy generated by a given merger and the type of error in the merger decision that is more likely to occur. The larger the level of merger‐induced synergy, the greater the likelihood of a Type II error whereby a consumer surplus‐decreasing merger is allowed. The smaller the level of synergy, the greater the likelihood of a Type I error whereby a consumer surplus‐increasing merger is rejected.