Nonparametric measurement of potential gains from mergers: an additive decomposition and application to Indian bank mergers

In this paper, we derive conditions under which merger between a number of firms within the same industry would induce a more cost efficient production of the aggregate output bundle, especially in the short-run, and show that potential cost economies from a merger can be attributed to three factors: convexity of the technology, sub-additivity of the ray short-run total cost curve, and a trade-off between reduction in the variable cost and increase in fixed cost arising from an aggregation of the fixed inputs of the merging units. We use this proposed analytical framework to evaluate the gains from various recent bank mergers in India. We employ the nonparametric method of Data Envelopment Analysis for retrospectively quantifying the potential gain from specific mergers and its components both in the short-run and in the long-run.