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Mergers with Product Market Risk

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  • Albert Banal‐Estañol
  • Marco Ottaviani

Abstract

This paper studies the causes and the consequences of horizontal mergers among risk‐averse firms. The amount of diversification depends on the allocation of shares among the merging firms, with a direct risk‐sharing effect and an indirect strategic effect. If firms compete in quantities, consolidation makes firms more aggressive. Mergers involving few firms are then profitable with a relatively low level of risk aversion. With strong enough risk aversion, mergers reduce prices and improve social welfare. If firms instead compete in prices, consumers do not benefit from mergers in markets with demand uncertainty, but can easily benefit with cost uncertainty.

Suggested Citation

  • Albert Banal‐Estañol & Marco Ottaviani, 2006. "Mergers with Product Market Risk," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 577-608, September.
    • Handle: RePEc:bla:jemstr:v:15:y:2006:i:3:p:577-608
    DOI: 10.1111/j.1530-9134.2006.00111.x
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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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