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LARGE IS BEAUTIFUL: HORIZONTAL MERGERS FOR BETTER EXPLOITATION OF PRODUCTION SHOCKS -super-

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  • WEN ZHOU

Abstract

The profitability of horizontal mergers is investigated in a situation in which firms face a production shock and therefore are uncertain about their future costs. I show that, due to production rationalization, small-scale mergers can be profitable if the uncertainty is large. The efficiency gain in production also implies benign welfare consequences. Under cost uncertainty, a profitable merger always improves social welfare if no more than half of the industry's firms are allowed to merge. Finally, I show that the incentives to merge depend on the information structure. Firms are less likely to merge when they possess more information. Copyright 2008 The Author.

Suggested Citation

  • Wen Zhou, 2008. "LARGE IS BEAUTIFUL: HORIZONTAL MERGERS FOR BETTER EXPLOITATION OF PRODUCTION SHOCKS -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 56(1), pages 68-93, March.
  • Handle: RePEc:bla:jindec:v:56:y:2008:i:1:p:68-93
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    Cited by:

    1. Kai A.Konrad, 2010. "Merger Profitability in Industries with Brand Portfolios and Loyal Customers," Korean Economic Review, Korean Economic Association, vol. 26, pages 5-26.
    2. Le Pape, Nicolas & Zhao, Kai, 2014. "Horizontal mergers and uncertainty," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-31.

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