In a recent article in this journal,1 Dr Jorge Padilla discusses a speech that one of us had given on the interrelation between merger control and profit margins.2 The speech had pointed out that, according to empirical research, recent decades have been characterised by a secular trend towards higher profit margins, in particular in the US. From an economic perspective, increased pricing power implies that future horizontal mergers involving firms with high margins are more likely to be problematic than would otherwise be the case. Merger control should therefore be more vigilant when facing an expansion of profit margins in specific sectors or in the economy at large.

In his paper, Dr Padilla questions these conclusions. Although he acknowledges that profit margins have a useful role to play in merger analysis, he argues that mergers involving firms with high margins should not be viewed more critically than other transactions. According to his paper, subjecting mergers in industries with high margins to stricter controls would lead to systematic enforcement errors and cannot be justified economically.

We welcome the opportunity to continue discussing this important topic and, in this rejoinder, we respond to his arguments. Section II first summarises the economic implications of increased profit margins for merger enforcement. Section III then responds to Dr Padilla’s criticism and the arguments he puts forward to support a cautious application of margin analysis in merger control. Section IV, finally, concludes.