Unilateral merger effects in bidding markets: Evidence from the road maintenance market

Abstract

This paper studies non-coordinated merger effects in bidding markets with an application from the Finnish road maintenance market. In 2018, the Finnish Competition and Consumer Authority unconditionally approved the merger between YIT and Lemminkäinen, two Finnish construction companies that both competed in the market for publicly procured road maintenance contracts during the time of the merger. At the time of the merger YIT and Lemminkäinen held the second and third highest market shares respectively, whereas most road maintenance contracts were held by Destia.

The presumption of a merger’s economic harm used to justify the competition authority’s intervention in the merger process is based on the merging parties’ ability to internalize the competitive pressure that restricted their pricing power before the merger. Once this constraint is removed, the parties have a unilateral incentive to increase their bids leading to higher expected procurement costs for the government. However, the anticompetitive effects of the merger might be offset by efficiency gains if the merger enables a more efficient allocation of resources between the parties. If rivals find these efficiency gains credible, they might adjust their best-response bidding strategy by starting to bid more aggressively which would further strengthen the merger’s procompetitive effects.

I estimate the YIT-Lemminkäinen merger’s price-effect with a difference-in-differences estimator that exploits geographical variation in Lemminkäinen’s bidding activity which is used to proxy the merger’s expected competitive impact in any given region. I find that the merger decreased procurement costs by 8 percent in regions where Lemminkäinen was actively bidding pre-merger, compared to regions where it bid less actively. The estimated price-effect is statistically significant and robust to the choice whether Lemminkäinen’s pre-merger activity is modelled by a binary or a continuous (score) variable.