In a new analysis for the American Bar Association’s Antitrust Source, authors Christopher Lau and Andrew Sfekas examine how marginal costs should be defined in complex contracting environments. Their article “What’s in a Margin? Marginal Costs and Merger Efficiencies in Contracting Settings” argues that traditional understandings of marginal cost fail to account for industry-specific structures and competition dynamics, potentially mis-categorizing important marginal components as fixed. The authors consider the implications of this logic on merger efficiencies.
Key Insights
- Contextual Accuracy: Relying on generalized economic assumptions rather than specific firm structures can lead to significant errors in predictions to merger price-effects.
- The Contracting Variable: In sectors with complex contacts that result in high-volume commitments, such as healthcare and procurement settings, a broader understanding of pricing dynamics is required to isolate costs that are truly marginal.
- Methodological Framework: The authors provide a theoretical example in hospital mergers that shows that costs that could be considered as fixed under traditional pricing settings may be consider marginal in large-volume contracting settings, making them candidates for cognizable merger efficiencies.
Conclusion
Practitioners should evaluate the impact that industry and firm structure have on what costs should be considered marginal. Defining costs correctly can have significant implications for predicting merger price effects and understanding whether cost savings can be candidates for cognizable merger efficiencies.
This article was originally published by the American Bar Association’s Antitrust Source in February 2026. The views expressed herein are solely those of the authors and do not necessarily represent the views of Cornerstone Research.
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