Abstract Critical loss analysis is often used to argue that firms with large margins have more to lose from a reduction in sales and hence are less likely to increase prices. This argument ignores the implication of economic theory that profit-maximizing competitors that do not coordinate their pricing only have large margins if their customers are not very price sensitive. We explore the implications of critical loss analysis using an internally consistent model of oligopoly. We show that for a given degree of substitutability between the merging firms' products, firms with larger pre-merger margins will raise prices more than firms with smaller margins. This reinforces the traditional view that mergers are more likely to harm consumers when the merging firms have greater market power, as measured by their margins. We also derive internally consistent formulas for evaluating the profitability of price increases when defining markets and evaluating unilateral competitive effects
