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Horizontal Mergers and Divestment Dynamics in a Sunset Industry

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  • Nishiwaki, Masato

Abstract

In an oligopolistic market, socially excessive entry takes place because of business-stealing effect which is a gain to the entrant but not to the industry as a whole. Similarly, in a sunset industry with declining demand, now socially excessive capacity cannnot be dissolved because everyone intends to free ride on the reduction of industry supply expected from someone else’s divestment. As a result, no firm will divest, even though divestment contributes to the saving on fixed costs. This paper highlights the role of mergers as a device for internalizing the business-stealing effect and thereby promoting divestment, and examines if the merger-induced divestment could improve the total welfare using the case of cement mergers in Japan. A model of divestment based on the Markov perfect equilibrium framework of Ericson and Pakes (1995) is estimated by an asymptotic least squares. Then a counterfactual experiment is conducted to quantify the welfare impact of mergers, and to show that merged firms in fact divested their facilities more and contributed to the improvement of the total welfare despite the reduced consumers surplus.

Suggested Citation

  • Nishiwaki, Masato, 2008. "Horizontal Mergers and Divestment Dynamics in a Sunset Industry," MPRA Paper 21812, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:21812
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    File URL: https://mpra.ub.uni-muenchen.de/21812/1/MPRA_paper_21812.pdf
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    References listed on IDEAS

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    1. Ackerberg, Daniel & Lanier Benkard, C. & Berry, Steven & Pakes, Ariel, 2007. "Econometric Tools for Analyzing Market Outcomes," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 63, Elsevier.
    2. Victor Aguirregabiria & Pedro Mira, 2007. "Sequential Estimation of Dynamic Discrete Games," Econometrica, Econometric Society, vol. 75(1), pages 1-53, January.
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    Cited by:

    1. Tetsuji Okazaki & Ken Onishi & Naoki Wakamori, 2022. "Excess Capacity And Effectiveness Of Policy Interventions: Evidence From The Cement Industry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 883-915, May.
    2. Takahashi, Yuya, 2013. "Estimating a War of Attrition: The Case of the U.S. Movie Theater Industry," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 424, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    3. Pesendorfer, Martin & Takahashi, Yuya & Otsu, Taisuke, 2014. "Testing Equilibrium Multiplicity in Dynamic Games," CEPR Discussion Papers 10111, C.E.P.R. Discussion Papers.
    4. Taisuke Otsu & Martin Pesendorfer & Yuya Takahashi, 2016. "Pooling data across markets in dynamic Markov games," Quantitative Economics, Econometric Society, vol. 7(2), pages 523-559, July.
    5. Kiki Verico, 2020. "How to Measure Bilateral Economic Relations? Case of Indonesia – Australia," LPEM FEBUI Working Papers 202056, LPEM, Faculty of Economics and Business, University of Indonesia, revised 2020.
    6. NAKAMURA Tsuyoshi & OHASHI Hiroshi, 2020. "Imports, Exports, and the Impact of Mergers on Domestic Markets: A Case Study from Japan's Copper Tube Industry," Discussion papers 20013, Research Institute of Economy, Trade and Industry (RIETI).
    7. Angelo Castaldo & Laura Ferrari-Bravo, 2014. "Mergers in declining industries: puzzles from competition and industrial policies," Public Finance Research Papers 9, Istituto di Economia e Finanza, DSGE, Sapienza University of Rome.
    8. Suguru Otani, 2021. "Estimating Endogenous Coalitional Mergers: Merger Costs and Assortativeness of Size and Specialization," Papers 2108.12744, arXiv.org, revised Mar 2023.

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    More about this item

    Keywords

    dynamic discrete game; facility divestment dynamics; horizontal mergers; sunset industry; cement;
    All these keywords.

    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

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