Estimation of Cost Efficiencies from Mergers: Application to U.S. Radio

This paper develops a way to estimate fixed-cost efficiencies from mergers. The estimates might be used to assess the total welfare impact of retrospective and counterfactual mergers. The procedure uses a structural model in which companies play a dynamic game with endogenous mergers and product-repositioning decisions. This formulation corrects for a sample selection of more profitable mergers and captures follow-up mergers as well as post-merger product repositionings. The basic idea behind the estimator is to treat mergers as endogenous, thereby allowing for a comparison between mergers observed in the data and counterfactual ones, based on simulated long-run gains for different levels of cost efficiencies. The framework is applied to estimate cost efficiencies after the 1996 de-regulation of U.S. radio. I find that average cost savings (across all owners), over the period 1996-2006, only from mergers after 1996, amount to about $1.2 billion per year (roughly $0.6b from economies of scale and another $0.6b from within-format cost synergies).