Merged Firms Offer Less Product Variety

In 2022, mergers and acquisitions (M&A) in the United States reached a total of $2.4 trillion. M&A transactions present acquiring firms with a valuable opportunity to extend their managerial expertise across a broader range of products or geographic markets. However, the consolidation resulting from M&A raises ongoing concerns for policymakers, encompassing product pricing, quality, innovation, and particularly, product variety, which will be explored in detail in this article.

The selection of post-M&A product portfolios by firms sheds light on the synergies and cost savings achieved through mergers, as well as the potential adverse effects on consumers due to reduced product availability. According to certain models, M&A enable merging firms to discontinue closely competing products, thus reducing costly duplication and mitigating profit erosion caused by product market overlap. Conversely, other models propose that M&A allow firms to rapidly expand in specific product segments. Given that some of the acquired product lines may not align with the merged firm’s core competencies, these theories anticipate significant post-merger product turnover, with products far from the merged firm’s core likely to be divested or discontinued. Models in this category anticipate that consumers will experience a narrower array of products, leading to a reduction in consumer surplus in addition to potential price increases resulting from the merger.

Previous research aligns with both perspectives. On one hand, Vojislav Maksimovic, Gordon Phillips, and N.R. Prabhala’s research indicates that almost half of the manufacturing plants acquired in mergers are either closed down or divested within three years following the M&A, with a notable likelihood of retaining plants in industries peripheral to the firm’s core markets. Conversely, studies on mergers among radio broadcasters by Steven Berry, Joel Waldfogel, and Andrew Sweeting demonstrate a post-M&A increase in product variety.

In our new research paper, we investigate the evolution of merged firms’ product portfolios based on a sample of 66 M&A transactions among firms in the consumer packaged goods sector. Similar to the research by Maksimovic, Phillips, and Prabhala, our sample encompasses a diverse range of product markets. Similarly to the analysis by Berry, Waldfogel, and Sweeting, we scrutinize the varieties accessible to consumers within specific product markets. Our paper establishes three primary empirical patterns…