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Merger Performance under Uncertain Efficiency Gains

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  • Licun Xue

    (Department of Economics, University of Aarhus)

  • Rabah Amir

    (CORE and Department of Economics, UCL)

  • Effrosyni Diamantoudi

    (Department of Economics, University of Aarhus)

Abstract

In view of the uncertainty over the ability of merging firms to achieve efficiency gains, we model the post-merger situation as a Cournot oligopoly wherein the outsiders face uncertainty about the merged entity’s final cost. At the Bayesian equilibrium, a bilateral merger is profitable provided that non-merged firms sufficiently believe that the merger will generate large enough efficiency gains, even if ex post none actually materialize. The effects of the merger on market performance are shown to follow similar threshold rules. The findings are broadly consistent with stylized facts, and provide a rationalization for an efficiency consideration in merger policy.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2004.79.

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Date of creation: May 2004
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Handle: RePEc:fem:femwpa:2004.79

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Keywords: Horizontal merger; Bayesian Cournot equilibrium; Efficiency gains; Market performance;

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References

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  1. Banal-Estanol, Albert, 2007. "Information-sharing implications of horizontal mergers," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 31-49, February.
  2. Davidson, Carl & Mukherjee, Arijit, 2007. "Horizontal mergers with free entry," International Journal of Industrial Organization, Elsevier, vol. 25(1), pages 157-172, February.
  3. Pesendorfer, Martin, 2003. " Horizontal Mergers in the Paper Industry," RAND Journal of Economics, The RAND Corporation, vol. 34(3), pages 495-515, Autumn.
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  6. Philippe Choné & Laurent Linnemer, 2006. "Assessing Horizontal Mergers under Uncertain Efficiency Gains," CESifo Working Paper Series 1726, CESifo Group Munich.
  7. Rabah Amir, 2000. "On the Effects of Entry in Cournot Markets," Econometric Society World Congress 2000 Contributed Papers 1475, Econometric Society.
  8. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May.
  9. Kim, E Han & Singal, Vijay, 1993. "Mergers and Market Power: Evidence from the Airline Industry," American Economic Review, American Economic Association, vol. 83(3), pages 549-69, June.
  10. Spector, David, 2003. "Horizontal mergers, entry, and efficiency defences," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1591-1600, December.
  11. Gugler, Klaus & Mueller, Dennis C. & Yurtoglu, B. Burcin & Zulehner, Christine, 2003. "The effects of mergers: an international comparison," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 625-653, May.
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  14. AMIR, Rabah, 1994. "Cournot Oligopoly and the Theory of Supermodular Games," CORE Discussion Papers 1994013, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  16. Banal-Estanol, Albert & Macho-Stadler, Ines & Seldeslachts, Jo, 2008. "Endogenous mergers and endogenous efficiency gains: The efficiency defence revisited," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 69-91, January.
  17. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009 Elsevier.
  18. Mialon, Sue H., 2008. "Efficient horizontal mergers: The effects of internal capital reallocation and organizational form," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 861-877, July.
  19. Ramón Faulí-Oller, 1997. "On merger profitability in a cournot setting," Working Papers. Serie AD 1997-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  20. Ajeyo Banerjee & E. Woodrow Eckard, 1998. "Are Mega-Mergers Anticompetitive? Evidence from the First Great Merger Wave," RAND Journal of Economics, The RAND Corporation, vol. 29(4), pages 803-827, Winter.
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  23. Werden, Gregory J & Froeb, Luke M, 1994. "The Effects of Mergers in Differentiated Products Industries: Logit Demand and Merger Policy," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 407-26, October.
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Citations

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Cited by:
  1. Philippe Choné & Laurent Linnemer, 2006. "Assessing Horizontal Mergers under Uncertain Efficiency Gains," CESifo Working Paper Series 1726, CESifo Group Munich.
  2. Banal-Estanol, Albert & Macho-Stadler, Ines & Seldeslachts, Jo, 2008. "Endogenous mergers and endogenous efficiency gains: The efficiency defence revisited," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 69-91, January.
  3. Huck, S. & Konrad, K.A. & Müller, W., 2005. "Merger Without Costs Advantage," Discussion Paper 2005-019, Tilburg University, Tilburg Law and Economic Center.
  4. Emilie Dargaud, 2013. "Horizontal mergers, efficiency gains and remedies," European Journal of Law and Economics, Springer, vol. 36(2), pages 349-372, October.
  5. Sergio Currarini & Marco A. Marini, 2013. "Coalitional Approaches to Collusive Agreements in Oligopoly Games," DIAG Technical Reports 2013-15, Department of Computer, Control and Management Engineering, Universita' degli Studi di Roma "La Sapienza".
  6. Konrad, Kai A., 2010. "Merger profitability in industries with brand portfolios and loyal customers," Discussion Papers, Research Professorship & Project "The Future of Fiscal Federalism" SP II 2010-08, Social Science Research Center Berlin (WZB).
  7. Albert Banal-Estañol & Inés Macho-Stadler & Jo Seldeslachts, 2004. "Mergers, Investment Decisions and Internal Organisation," Working Papers 111, Barcelona Graduate School of Economics.
  8. Le Pape, Nicolas & Zhao, Kai, 2013. "Horizontal mergers and uncertainty," Economics Discussion Papers 2013-62, Kiel Institute for the World Economy.
  9. Ding, Wei & Fan, Cuihong & Wolfstetter, Elmar G., 2013. "Horizontal mergers with synergies: Cash vs. profit-share auctions," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 382-391.
  10. Joseph A. Clougherty & Tomaso Duso, 2010. "Using Rival Effects to Identify Synergies and Improve Merger Typologies," CIG Working Papers SP II 2010-13, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  11. Jovanovic, Dragan & Wey, Christian, 2012. "An equilibrium analysis of efficiency gains from mergers," DICE Discussion Papers 64, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  12. Borla, Stefania, 2012. "Spatial competition and merging incentives when firms produce complements," Regional Science and Urban Economics, Elsevier, vol. 42(1-2), pages 221-229.
  13. 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.
  14. Berardino Cesi, 2010. "Horizontal Mergers: A Solution Of The Insiders' Dilemma," Bulletin of Economic Research, Wiley Blackwell, vol. 62(2), pages 171-180, 04.
  15. Bilotkach, Volodymyr & Hüschelrath, Kai, 2012. "Airline alliances and antitrust policy: The role of efficiencies," Journal of Air Transport Management, Elsevier, vol. 21(C), pages 76-84.

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