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Mergers with Product Market Risk

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Author Info
Banal - Estanol, Albert
Ottaviani, Marco

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Abstract

This Paper studies the private incentives and the social effects of horizontal mergers among risk-averse firms. In our model, merging firms are allowed to choose how to split their joint profits, with implications for risk sharing and strategic behaviour in the product market. If firms compete in quantities, consolidation makes firms more aggressive due to improved risk sharing. Mergers involving few firms are then profitable with a relatively small level of risk aversion. With strong enough risk aversion, mergers result in lower prices and higher social welfare. If firms instead compete in prices, consumers do not benefit from mergers with demand uncertainty, but can easily benefit in markets with cost uncertainty.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4831.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4831

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Related research
Keywords: market imperfection; mergers and acquisitions; monopolization and horizontal anticompetitive practices; oligopoly;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rosella Nicolini & Francesco Menoncin, 2005. "The optimal behaviour of firms facing stochastic costs," UFAE and IAE Working Papers 640.05, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  2. Albert Banal-Estañol & Marco Ottaviani, 2006. "Bank Mergers and Diversification: Implications for Competition Policy," City University Economics Discussion Papers 06/11, Department of Economics, City University, London. [Downloadable!]
    Other versions:
  3. Kaniska Dam & Marc Escrihuela-Villar & Santiago Sanchez-Pages, 2009. "On the Relationship between Market Power and Bank Risk Taking," ESE Discussion Papers 187, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
  4. M. Pilar Socorro, 2004. "Mergers and the limited liability effect," Documentos de trabajo conjunto ULL-ULPGC 2004-11, Facultad de Ciencias Económicas de la ULPGC. [Downloadable!]
  5. Lisa R. Anderson & Beth A. Freeborn & Jason P. Hulbert, 2009. "Risk Aversion and Tacit Collusion in a Bertrand Duopoly Experiment," Working Papers 84, Department of Economics, College of William and Mary. [Downloadable!]
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