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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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