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Multidivisional firms, internal competition, and the merger paradox

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  • Anthony Creane
  • Carl Davidson

Abstract

Traditional modelling of mergers has the merged firms (insiders) cooperate and maximize joint profits. This approach has several unappealing results in quantity-setting games, for example, mergers typically are not profitable for insiders, but are profitable for non-merging firms (outsiders). We take a different approach and allow for a parent company that can play each insider off one another. In quantity-setting games, with our approach mergers are profitable for insiders, unprofitable for outsiders, socially beneficial, and involve (in a non-monopolizing merger) a small number of firms. Finally, we find that the optimal strategy depends on whether firms compete in quantity or prices.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 37 (2004)
Issue (Month): 4 (November)
Pages: 951-977

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Handle: RePEc:cje:issued:v:37:y:2004:i:4:p:951-977

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Citations

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Cited by:
  1. Nicolas Le Pape & Kai Zhao, 2010. "Cost-saving or Cost-enhancing Mergers: the Impact of the Distribution of Roles in Oligopoly," TEPP Working Paper 2010-18, TEPP.
  2. Heywood, John S. & McGinty, Matthew, 2011. "Cross-border mergers in a mixed oligopoly," Economic Modelling, Elsevier, vol. 28(1), pages 382-389.
  3. José Méndez-Naya, 2008. "Merger profitability in mixed oligopoly," Journal of Economics, Springer, vol. 94(2), pages 167-176, July.
  4. repec:ebl:ecbull:v:12:y:2007:i:12:p:1-7 is not listed on IDEAS
  5. José Méndez Naya, 2007. "Privatización y fusiones en oligopolios mixtos," Estudios de Economia, University of Chile, Department of Economics, vol. 34(1 Year 20), pages 37-52, June.
  6. Nicolas Le Pape & Kai Zhao, 2010. "Cost-saving or Cost-enhancing Mergers: the Impact of the Distribution of Roles in Oligopoly," Working Papers halshs-00812080, HAL.
  7. Steffen Huck & Kai A. Konrad & Wieland Müller, 2005. "Merger without Cost Advantages," CESifo Working Paper Series 1461, CESifo Group Munich.
  8. Beladi, Hamid & Mukherjee, Arijit, 2012. "Footloose foreign firm and profitable domestic merger," Journal of Economic Behavior & Organization, Elsevier, vol. 83(2), pages 186-194.
  9. Ziss, Steffen, 2007. "Hierarchies, intra-firm competition and mergers," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 237-260, April.
  10. Maiti, Dibyendu & Mukherjee, Arijit, 2013. "Trade cost reduction, subcontracting and unionised wage," Labour Economics, Elsevier, vol. 21(C), pages 103-110.
  11. Davidson, Carl & Mukherjee, Arijit, 2007. "Horizontal mergers with free entry," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 157-172, February.
  12. Mialon, Sue H., 2008. "Efficient horizontal mergers: The effects of internal capital reallocation and organizational form," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 861-877, July.
  13. repec:tep:teppwp:wp1018 is not listed on IDEAS
  14. Konrad, Kai A., 2010. "Merger profitability in industries with brand portfolios and loyal customers," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2010-08, Social Science Research Center Berlin (WZB).
  15. Artz, Benjamin & Heywood, John S. & McGinty, Matthew, 2009. "The merger paradox in a mixed oligopoly," Research in Economics, Elsevier, vol. 63(1), pages 1-10, March.
  16. Lommerud, Kjell Erik & Straume, Odd Rune & Sørgard, Lars, 2002. "Downstream merger with oligopolistic input suppliers," Discussion Papers, various Research Units FS IV 01-22, Social Science Research Center Berlin (WZB).
  17. Rasch, Alexander & Wambach, Achim, 2009. "Internal decision-making rules and collusion," Journal of Economic Behavior & Organization, Elsevier, vol. 72(2), pages 703-715, November.
  18. Anna Nagurney, 2010. "Formulation and analysis of horizontal mergers among oligopolistic firms with insights into the merger paradox: a supply chain network perspective," Computational Management Science, Springer, vol. 7(4), pages 377-406, October.
  19. Can Erutku & Patrick de Lamirande, 2009. "Merging with a buyer group member," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(7), pages 481-490.
  20. Dibyendu Maiti & Arijit Mukherjee, . "Trade Liberalisation, Subcontracting and Unionised Wage," Discussion Papers 10/07, University of Nottingham, GEP.
  21. Michael Higl & Peter Welzel, 2005. "Intra-firm Coordination and Horizontal Merger," Discussion Paper Series 269, Universitaet Augsburg, Institute for Economics.

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