Price effects of mergers in natural resources industries

The purpose of this paper is to estimate and analyse the price and welfare effects from the mergers between Rio Tinto and North Ltd. in 2000, and CVRD and Caemi in 2001. The analyses are conducted using a merger simulation model that, based on the pre-merger situation estimates the post-merger outcome. This paper applies a standard Cournot framework model where each firm produces a single homogenous product, and the firms’ strategic variable is quantities. The results from the merger simulation regarding the Rio Tinto/North Ltd. merger show that the merged firm has a combined market share of almost 20%. The estimated price increase due to the merger is 5.8%. Regarding the CVRD/Caemi merger the initial concentration in the pre-merger market is substantially larger than the year before, and the results indicate that the estimated price effect from the merger is more significant, almost 7%. Regarding the effect of prices on resource extraction, the estimated higher price of iron ore after the merger implies that substitution towards steel scrap in the steel-making process increases. This finding implies that resource extraction possibly has been lower than what might have been the case without the merger. Note that this effect is analysed as ceteris paribus, i.e., other impacts on iron ore demand and prices than the specific mergers have not been considered. In both merger simulations the overall welfare effect is estimated to be negative, something which thus does not support the European Commission's decisions to allow these mergers. However, none of the simulations did take into account possible cost efficiencies resulting from the mergers.