This paper analyzes the resource reallocation problem in merged firms when the merged firms have a choice to retain competition between the merging partners. We consider horizontal mergers between firms that differ only in their initial capital levels. When initial capital levels are unequal, evenly distributing total capital between merging partners improves the overall cost efficiency of the merged firm. In this case, the merger often results in the multidivisional structure (the M-form) rather than the conventional structure of completely integrating merging partners because, under the M-form, the profits from aggressive production expansion backed by efficiency-improving capital reallocation is higher than the profits from output contraction and rationalization under complete integration. Such a merger enhances market competition. On the contrary, mergers between identical firms always induce complete integration.
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