Abstract

Over the last twenty years there has been a significant concentration process in the pension fund manager industry in Chile (the number of firms has dropped from 21 in 1994 to only 6 in 2012). A major concern about the concentration of this industry is that firms might be able to exercise market power. However, significant efficiency gains could result from this concentration process, especially if there are economies of scale present in the industry. The welfare effect of a merger is, therefore, ambiguous. In this article, we estimate the welfare implications of a merger between two medium-sized pension fund managers in Chile. For this purpose, we estimate the size of the economies of scale in this industry and use the results to simulate the merger using a simple imperfect competition model. The estimations, based on quarterly financial information about the Chilean Pension Funds system for the last eight years, show robustly the presence of significant economies of scale in operating costs. The merger simulation indicates that, despite the cost savings, the merger would induce a small price increase. This effect reduces consumer welfare, but aggregate welfare increases because of the efficiency gains from the economies of scale. Since aggregate elasticity in this industry is zero (because affiliation is compulsory), the price increase does not generate any efficiency loss