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Implications of Unprofitable Horizontal Mergers: A Re-Interpretation of the Farrell-Shapiro-Framework

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Author Info
Oliver Budzinski () (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
Jürgen-Peter Kretschmer () (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)

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Abstract

We demonstrate that the popular Farrell-Shapiro-framework (FSF) for the analysis of mergers in oligopolies relies regarding its policy conclusions sensitively on the assumption that rational agents will only propose privately profitable mergers. If this assumption held, a positive external effect of a proposed merger would represent a sufficient condition to allow the merger. However, the empirical picture on mergers and acquisitions reveals a significant share of unprofitable mergers and economic theory, moreover, demonstrates that privately unprofitable mergers can be the result of rational action. Therefore, we extend the FSF by explicitly allowing for unprofitable mergers to occur with some frequency. This exerts a considerable impact on merger policy conclusions: while several insights of the original FSF are corroborated (f.i. efficiency defence), a positive external effect does not represent a sufficient condition for the allowance of a merger anymore. Applying such a rule would cause a considerable amount of false positives. In addition, we conclude that the FSF need to be explicitly complemented by a freedom of competition principle in order to make it workable as a basis for an economics-based merger policy.

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Publisher Info
Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series Marburg Working Papers on Economics with number 200714.

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Length: 20 pages
Date of creation: 2007
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Publication status: Forthcoming in
Handle: RePEc:mar:volksw:200714

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Related research
Keywords: oligopoly theory; horizontal merger policy; profitability of mergers; freedom of competition; antitrust;

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Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection

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