A Note on the Unique Implications of Consumer Price Sensitivity for Merger Assessment in Canada

Abstract

Greater consumer price sensitivity is associated with lower merger price effects, all else equal. This is because a merged firm has less of an incentive to raise prices when its customers are more price sensitive. Less appreciated is the fact that greater consumer price sensitivity may lead to higher or lower effects from a merger on total welfare (i.e., deadweight loss), depending on the prevailing market prices and margins, as well as the features of demand. We show that under certain circumstances, the deadweight loss arising from a merger can be an "inverted U-shaped" function of the elasticity of demand, such that the effect of greater consumer price sensitivity on deadweight loss depends on case-specific facts and economic modelling assumptions. This has important implications for merging parties and their counsel putting forth an efficiencies defence: while greater consumer price sensitivity will lead to lower estimates of merger price effects, it may nonetheless result in a higher deadweight loss.