Mergers, coordinated effects and efficiency in the Portuguese non-life insurance industry ☆ Duarte Brito a,d , Pedro Pereira b,d , Joaquim J.S. Ramalho c,d a Faculdade de Ciências e Tecnologia da Universidade Nova de Lisboa, Quinta da Torre, 2829-516 Caparica, Portugal b AdC, Avenida de Berna, 19, 7º, 1050-037 Lisboa, Portugal c Department of Economics, Universidade de Évora, Largo dos Colegiais 2, 7000-803 Évora, Portugal d CEFAGE-UE, Largo Marquês de Marialva 8, 7000-809 Évora, Portugal abstract article info Article history: Received 31 July 2012 Received in revised form 26 September 2013 Accepted 4 October 2013 Available online 11 October 2013 JEL Classification: D43 K21 L13 Keywords: Mergers Market power Efficiency Non-life insurance We evaluate the impact on market power and efficiency of a series of mergers on three Portuguese non-life insurance markets. We specify and estimate, with a panel of firm-level data, a structural model which includes: preferences, technology, and a market equilibrium condition. Firms' demand curves are not very elastic. Firms' technologies exhibit scale and scope economies and high cost efficiency scores. We find that, for the period following the mergers, there is no evidence of: (i) an increase in market power through coordinated behavior, or (ii) changes in cost efficiency levels. In addition, social welfare increased. © 2013 Elsevier B.V. All rights reserved. 1. Introduction When analyzing a merger, Competition Authorities usually focus on the impact the operation has on market power and efficiency. Supposedly there is a trade-off between these two aspects. On the one hand, mergers may increase firms' incentives to increase prices, either unilaterally or through coordination. On the other hand, mergers may reduce firms' marginal costs, as argued by Williamson (1968). Economies of scale, economies of scope, or other synergies, due to the combination of complementary assets, may lead to this decrease in costs. However, managerial slack, due to the decrease in competition, may have the opposite effect. Thus, the overall impact of a merger on prices, marginal costs and welfare is potentially ambiguous. In Portugal, between 1999 and 2007, there were seven concentration operations involving firms operating in non-life insurance markets, as summarized in Table 1. This series of mergers provides a unique opportunity to measure ex-post some of the aforementioned effects. In Section 3 we provide additional information about the Portuguese non- life insurance sector. In this article, we evaluate the impact of mergers on: (i) the exercising of market power through coordinated effects, and (ii) the firms' internal efficiency. To conduct the analysis, we specify and estimate a structural model that includes: preferences, technology, and a market equilibrium condition. Our data set consists of a rich panel of annual accounting data from 13 Portuguese insurers for the period of 1999 to 2007 operating in three non-life insurance markets: motor vehicles, employers' liability and fire and other damage to property. On average, these firms accounted for about 80% of the premium volume in the whole non-life sector for the period of our sample. Preferences are represented by a discrete choice model, which is used to estimate the price elasticities of demand. Firms' demands are elastic, although not much. Technology is represented by a stochastic cost frontier, which is used to estimate marginal costs, returns to scale and efficiency levels. Firms exhibit scale and scope economies and high efficiency scores. In the period following the mergers, there is no evidence of changes in cost efficiency. The market equilibrium is represented by a set of first-order conditions for prices, which nest Nash equilibrium and joint profit maximization, as well as intermediate degrees of competition between these two cases, allowing a rich characterization of strategic interaction International Journal of Industrial Organization 31 (2013) 554–568 ☆ The opinions expressed in this article reflect only the authors' views, and in no way bind the institutions to which they are affiliated. We thank J. Hastings, the editor, an anonymous referee and T. Ribeiro for useful comments. Financial support from Fundação para a Ciência e Tecnologia, program FEDER/POCI 2010 is acknowledged. E-mail addresses: dmb@fct.unl.pt (D. Brito), pedro.br.pereira@gmail.com (P. Pereira), jsr@uevora.pt (J.J.S. Ramalho). 0167-7187/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.ijindorg.2013.10.001 Contents lists available at ScienceDirect International Journal of Industrial Organization journal homepage: www.elsevier.com/locate/ijio