Advanced Search
MyIDEAS: Login to save this paper or follow this series

Implications of Unprofitable Horizontal Mergers: A Positive External Effect does not Suffice to Clear a Merger!

Contents:

Author Info

  • Oliver Budzinski

    ()
    (Department of Environmental and Business Economics, University of Southern Denmark)

  • Jürgen-Peter Kretschmer

    ()
    (Economic Policy Unit, Philipps-University of Marburg, Germany)

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. We thank all participants of the 29th HOS Conference (Marburg, November 2007), the 35th EARIE Conference (Toulouse, September 2008) and the Annual Meeting of the Verein für Socialpolitik (Graz, September 2008) for a valuable and helpful discussion of this paper. Furthermore, we thank Barbara Güldenring for editorial assistance.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sdu.dk/~/media/Files/Om_SDU/Institutter/Miljo/ime/wp/budzinski84.ashx
File Function: First version, 2009-02
Download Restriction: no

Bibliographic Info

Paper provided by University of Southern Denmark, Department of Environmental and Business Economics in its series Working Papers with number 84/09.

as in new window
Length: 41 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:sdk:wpaper:84

Contact details of provider:
Postal: Niels Bohrs Vej 9, 6700 Esbjerg
Phone: (+45) 6550 1000
Fax: (+45) 6550 1091
Email:
Web page: http://www.sam.sdu.dk/ime
More information through EDIRC

Related research

Keywords: Oligopoly theory; horizontal merger policy; profitability of mergers; antitrust;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Novshek, William, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 52(1), pages 85-98, January.
  2. Levin, D., 1988. "Horizontal Mergers: The 50 Percent Bench-Mark," Papers 19, Houston - Department of Economics.
  3. Duso, Tomaso & Gugler, Klaus & Yurtoglu, Burcin B., 2006. "How Effective is European Merger Control?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 153, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Shleifer, Andrei & Vishny, Robert W, 1988. "Value Maximization and the Acquisition Process," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 7-20, Winter.
  5. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
  6. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
  7. Brueckner, Jan K. & Spiller, Pablo T., 1991. "Competition and mergers in airline networks," International Journal of Industrial Organization, Elsevier, vol. 9(3), pages 323-342, September.
  8. Nilssen, T. & Sogard, L., 1995. "Sequential Horizontal Mergers," Papers 04-95, Norwegian School of Economics and Business Administration-.
  9. 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.
  10. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  11. Spector, David, 2002. "Horizontal mergers, entry, and efficiency defences," CEPREMAP Working Papers (Couverture Orange) 0206, CEPREMAP.
  12. D. Dragone & L. Lambertini & A. Mantovani, 2006. "Horizontal Mergers with Scale Economies," Working Papers 571, Dipartimento Scienze Economiche, Universita' di Bologna.
  13. Verboven, Frank, 1995. "Corporate restructuring in a collusive oligopoly," International Journal of Industrial Organization, Elsevier, vol. 13(3), pages 335-354, September.
  14. Klaus Gugler & Dennis C. Mueller & B. Burcin Yurtoglu & Christine Zulehner, 2001. "The Effects of Mergers: An International Comparison," CIG Working Papers FS IV 01-21, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  15. Fabienne Ilzkovitz & Roderick Meiklejohn, 2003. "European Merger Control: Do We Need an Efficiency Defence?," Journal of Industry, Competition and Trade, Springer, vol. 3(1), pages 57-85, March.
  16. Röller, Lars-Hendrik & Stennek, Johan & Verboven, Frank, 2000. "Efficiency Gains from Mergers," Working Paper Series 543, Research Institute of Industrial Economics.
  17. Fauli-Oller, Ramon, 2002. "Mergers between Asymmetric Firms: Profitability and Welfare," Manchester School, University of Manchester, vol. 70(1), pages 77-87, January.
  18. Gunther Tichy, 2001. "What Do We Know about Success and Failure of Mergers?," Journal of Industry, Competition and Trade, Springer, vol. 1(4), pages 347-394, December.
  19. Cheung, Francis K., 1992. "Two remarks on the equilibrium analysis of horizontal merger," Economics Letters, Elsevier, vol. 40(1), pages 119-123, September.
  20. Tomaso Duso & Damien J. Neven & Lars-Hendrik Röller, 2007. "The Political Economy of European Merger Control: Evidence using Stock Market Data," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 455-489.
  21. David Hennessy, 2000. "Cournot Oligopoly Conditions under which Any Horizontal Merger Is Profitable," Review of Industrial Organization, Springer, vol. 17(3), pages 277-284, November.
  22. Farrell, J. & Shapiro, C., 1988. "Horizontal Mergers: An Equilibrium Analysis," Papers 17, Princeton, Woodrow Wilson School - Discussion Paper.
  23. Kaplan, Steven N & Weisbach, Michael S, 1992. " The Success of Acquisitions: Evidence from Divestitures," Journal of Finance, American Finance Association, vol. 47(1), pages 107-38, March.
  24. Fridolfsson, Sven-Olof, 2007. "Anti- versus Pro-Competitive Mergers," Working Paper Series 694, Research Institute of Industrial Economics.
  25. Farrell, Joseph & Shapiro, Carl, 1991. "Horizontal Mergers: Reply," American Economic Review, American Economic Association, vol. 81(4), pages 1007-11, September.
  26. Damien J. Neven, 2006. "Competition economics and antitrust in Europe," Economic Policy, CEPR & CES & MSH, vol. 21(48), pages 741-791, October.
  27. repec:ant:wpaper:1999018 is not listed on IDEAS
  28. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
  29. Bruner, Robert F., 1988. "The Use of Excess Cash and Debt Capacity as a Motive for Merger," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(02), pages 199-217, June.
  30. Raghavendra Rau, P. & Vermaelen, Theo, 1998. "Glamour, value and the post-acquisition performance of acquiring firms," Journal of Financial Economics, Elsevier, vol. 49(2), pages 223-253, August.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sdk:wpaper:84. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ulla H. Oehlenschläger).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.