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Predation and Mergers: Is Merger Law Counterproductive?

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  • Persson, Lars

Abstract

This Paper shows that predation might help firms overcome the free riding problem of mergers by changing the acquisition situation in the buyer's favour relative to the firms outside the merger. It is also shown that the bidding competition for the prey's assets is most harmful to predators when the use of the prey's assets exerts strong negative externalities on rivals, i.e. when their use severely reduces competitors' profits. The reason is that potential buyers are then willing to pay a high price for the prey in order to prevent other buyers from obtaining the assets. This implies that predators prefer predation technologies that destroy the prey's assets since they limit the negative effects of the subsequent bidding competition for the prey. It is also shown that a restrictive merger policy might be counterproductive, since it might increase the incentives for predation by helping predators avoid the bidding competition. Moreover, the incentive for predation under the US failing firm defence might be strong, since it allows mergers but limits the bidding competition.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2734.

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Date of creation: Mar 2001
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Handle: RePEc:cpr:ceprdp:2734

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Keywords: Failing Firm Defence; Merger Law; Mergers; Predation;

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References

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  1. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
  2. Persson, Lars, 1998. "The Auctioning of a Failing Firm," Working Paper Series 514, Research Institute of Industrial Economics.
  3. Yamey, B S, 1972. "Predatory Price Cutting: Notes and Comments," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 129-42, April.
  4. Waldman, Michael, 1987. "Noncooperative Entry Deterrence, Uncertainty, and the Free Rider Problem," Review of Economic Studies, Wiley Blackwell, vol. 54(2), pages 301-10, April.
  5. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-27, March.
  6. Morton I. Kamien & Israel Zang, 1988. "The Limits of Monopolization Through Acquisition," Discussion Papers 802, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. Appelbaum, Elie & Weber, Shlomo, 1992. "A note on the free rider problem in oligopoly," Economics Letters, Elsevier, vol. 40(4), pages 473-480, December.
  8. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
  9. Dan Kovenock & Suddhasatwa Roy, 2005. "Free Riding in Noncooperative Entry Deterrence with Differentiated Products," Southern Economic Journal, Southern Economic Association, vol. 72(1), pages 119–137, July.
  10. Dermot Nolan, 1998. "Predatory Pricing in an Oligopolistic Framework," Royal Holloway, University of London: Discussion Papers in Economics 98/4, Department of Economics, Royal Holloway University of London, revised Feb 1998.
  11. Garth Saloner, 1987. "Predation, Mergers, and Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 165-186, Summer.
  12. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter.
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Citations

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Cited by:
  1. Fumagalli, Chiara & Motta, Massimo & Persson, Lars, 2007. "On the Anticompetitive Effect of Exclusive Dealing when Entry by Merger is Possible," Working Paper Series 718, Research Institute of Industrial Economics.
  2. Fumagalli, Chiara & Motta, Massimo & Persson, Lars, 2005. "Exclusive Dealing, Entry and Mergers," CEPR Discussion Papers 4902, C.E.P.R. Discussion Papers.
  3. Miguel González-Maestre & Diego Peñarrubia, 2005. "Innovation, merger policy and technology transfer," Investigaciones Economicas, Fundación SEPI, vol. 29(1), pages 181-201, January.
  4. Dermot Nolan, 1998. "Predatory Pricing in an Oligopolistic Framework," Royal Holloway, University of London: Discussion Papers in Economics 98/4, Department of Economics, Royal Holloway University of London, revised Feb 1998.
  5. Norbäck, Pehr-Johan & Persson, Lars, 2007. "Globalization and Profitability of Cross-border Mergers & Acquisitions," CEPR Discussion Papers 6102, C.E.P.R. Discussion Papers.
  6. Appelbaum, Elie & Weber, Shlomo, 1992. "A note on the free rider problem in oligopoly," Economics Letters, Elsevier, vol. 40(4), pages 473-480, December.
  7. Pehr-Johan Norbäck & Lars Persson, 2008. "Globalization and profitability of cross-border mergers and acquisitions," Economic Theory, Springer, vol. 35(2), pages 241-266, May.
  8. Friberg, Richard & Norbäck, Pehr-Johan & Persson, Lars, 2008. "Getting a Better Price: Strategic Behaviour before Changes in Ownership of Corporate Assets," Working Paper Series 777, Research Institute of Industrial Economics.

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