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Mergers Under Uncertainty: The Effects Of Debt Financing

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  • M. PILAR SOCORRO

Abstract

In this paper, we consider a Cournot oligopoly with demand uncertainty, fixed costs and constant marginal costs. The demand uncertainty makes some mergers that would be unprofitable in a certain environment profitable in this model. However, socially advantageous mergers may be still unprofitable for the colluding firms, so public intervention may be needed. One possibility consists in subsidizing such mergers. However, the combination of limited liability debt financing and an appropriate antitrust policy leads to higher social welfare than subsidies. The reason is that, given the limited liability effect, merging parties compete more aggressively, so the reduction in market quantity is mitigated.

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  • M. Pilar Socorro, 2007. "Mergers Under Uncertainty: The Effects Of Debt Financing," Manchester School, University of Manchester, vol. 75(5), pages 580-597, September.
    • Handle: RePEc:bla:manchs:v:75:y:2007:i:5:p:580-597
    DOI: 10.1111/j.1467-9957.2007.01031.x
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    Cited by:

    1. Sumit K. Majumdar & Rabih Moussawi & Ulku Yaylacicegi, 2018. "Capital Structure and Mergers: Retrospective Evidence from a Natural Experiment," Journal of Industry, Competition and Trade, Springer, vol. 18(4), pages 449-472, December.
    2. Bernard Franck & Nicolas Le Pape, 2020. "The limited liability effect: Implications for anticompetitive horizontal mergers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 2082-2102, December.
    3. Bernard Franck & Nicolas Le Pape, 2010. "Bankruptcy Risk, Product Market Competition and Horizontal Mergers," Working Papers halshs-00812086, HAL.

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