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Merger Performance under Uncertain Efficiency Gains

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Author Info
Licun Xue (Department of Economics, University of Aarhus)
Rabah Amir (CORE and Department of Economics, UCL)
Effrosyni Diamantoudi (Department of Economics, University of Aarhus)

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

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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References listed on IDEAS
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. Gaudet, Gerard & Salant, Stephen W, 1991. "Increasing the Profits of a Subset of Firms in Oligopoly Models with Strategic Substitutes," American Economic Review, American Economic Association, vol. 81(3), pages 658-65, June. [Downloadable!] (restricted)
  2. McAfee, R Preston & Williams, Michael A, 1992. "Horizontal Mergers and Antitrust Policy," Journal of Industrial Economics, Blackwell Publishing, vol. 40(2), pages 181-87, June. [Downloadable!] (restricted)
  3. 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). [Downloadable!]
  4. Borenstein, Severin, 1990. "Airline Mergers, Airport Dominance, and Market Power," American Economic Review, American Economic Association, vol. 80(2), pages 400-404, May. [Downloadable!] (restricted)
  5. Mueller, Dennis C, 1985. "Mergers and Market Share," The Review of Economics and Statistics, MIT Press, vol. 67(2), pages 259-67, May. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. 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. [Downloadable!] (restricted)
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  8. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
  10. Besanko, David & Spulber, Daniel F, 1993. "Contested Mergers and Equilibrium Antitrust Policy," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(1), pages 1-29, April.
  11. 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. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
  13. Fauli-Oller, Ramon, 1997. "On merger profitability in a Cournot setting," Economics Letters, Elsevier, vol. 54(1), pages 75-79, January. [Downloadable!] (restricted)
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Cited by:
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  1. Albert Banal-Estaño & Inés Macho-Stadler & Jo Seldeslachts, 2004. "Mergers, Investment Decisions and Internal Organisation," CIG Working Papers SP II 2004-13, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG). [Downloadable!]
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  2. Philippe Choné & Laurent Linnemer, 2006. "Assessing Horizontal Mergers under Uncertain Efficiency Gains," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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