Anti-competitive mergers benefit competitors more than the merging firms. We show that such externalities reduce firms' incentives to merge (a hold-up mechanism). Firms delay merger proposals, thereby foregoing valuable profits and hoping other firms will merge instead - a war of attrition. The final result, however, is an overly concentrated market. We also demonstrate a surprising inter-temporal link. Merger incentives may be reduced by the prospect of additional profitable mergers in the future. The prospect of a future merger increases the value of becoming an insider in the first merger, which tends to hasten it. The prospect of a future merger may, however, increase the value of becoming an outsider in the first merger even more. If so, the first merger will be delayed by the prospect of the future merger. Merger control may help protect competition. Holdup and inter-temporal links make policy design more difficult, however. Even reasonable policies may be worse than not controlling mergers at all.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2705.
Find related papers by JEL classification: C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
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