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Large Is Beautiful: Horizontal Mergers For Better Exploitation Of Production Shocks

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  • WEN ZHOU

Abstract

The profitability of horizontal mergers is investigated in a situation in which firms face a production shock and therefore are uncertain about their future costs. I show that, due to production rationalization, small‐scale mergers can be profitable if the uncertainty is large. The efficiency gain in production also implies benign welfare consequences. Under cost uncertainty, a profitable merger always improves social welfare if no more than half of the industry's firms are allowed to merge. Finally, I show that the incentives to merge depend on the information structure. Firms are less likely to merge when they possess more information.

Suggested Citation

  • Wen Zhou, 2008. "Large Is Beautiful: Horizontal Mergers For Better Exploitation Of Production Shocks," Journal of Industrial Economics, Wiley Blackwell, vol. 56(1), pages 68-93, March.
  • Handle: RePEc:bla:jindec:v:56:y:2008:i:1:p:68-93
    DOI: 10.1111/j.1467-6451.2008.00333.x
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    References listed on IDEAS

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    1. Larry D. Qiu & Wen Zhou, 2007. "Merger waves: a model of endogenous mergers," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 214-226, March.
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    Cited by:

    1. Marc-Andreas Muendler, 2014. "Export or merge? Proximity vs. concentration in product space," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 21(1), pages 35-57, March.
    2. Kai A.Konrad, 2010. "Merger Profitability in Industries with Brand Portfolios and Loyal Customers," Korean Economic Review, Korean Economic Association, vol. 26, pages 5-26.
    3. Le Pape, Nicolas & Zhao, Kai, 2014. "Horizontal mergers and uncertainty," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-31.

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