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Endogenous horizontal mergers under cost uncertainty

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  • Zhou, Wen
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    Abstract

    This paper presents a study of endogenous horizontal mergers under cost uncertainty. Before knowing the exact values of their costs, firms decide sequentially whether or not to join a merger. After the merger decision is made, uncertainty is resolved and firms engage in Cournot competition with incomplete information about one another's costs. Due to production rationalization, the merged firms enjoy an advantage over non-merged firms in the sense that the merged firms' expected cost is lower. I show that mergers occur if and only if the uncertainty is large and that the larger the uncertainty, the greater the number of firms that will merge. Although a merger reduces competition and therefore hurts consumers, it improves productivity under cost uncertainty. I find that a merger increases social welfare whenever there are at least four firms in the industry before the merger.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 26 (2008)
    Issue (Month): 4 (July)
    Pages: 903-912

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    Handle: RePEc:eee:indorg:v:26:y:2008:i:4:p:903-912

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    Web page: http://www.elsevier.com/locate/inca/505551

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    References

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    Cited by:
    1. Le Pape, Nicolas & Zhao, Kai, 2013. "Horizontal mergers and uncertainty," Economics Discussion Papers 2013-62, Kiel Institute for the World Economy.
    2. Mariana Cunha & Paula Sarmento & Hélder Vasconcelos, 2014. "Uncertain Efficiency Gains and Merger Policy," FEP Working Papers 527, Universidade do Porto, Faculdade de Economia do Porto.
    3. Gordon M. Phillips & Alexei Zhdanov, 2013. "R&D and the Incentives from Merger and Acquisition Activity," Review of Financial Studies, Society for Financial Studies, vol. 26(1), pages 34-78.

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