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Endogenous horizontal mergers under cost uncertainty

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  • Zhou, Wen

Abstract

This paper presents a study of endogenous horizontal mergers under cost uncertainty. Before knowing the exact values of their costs, firms decide sequentially whether or not to join a merger. After the merger decision is made, uncertainty is resolved and firms engage in Cournot competition with incomplete information about one another's costs. Due to production rationalization, the merged firms enjoy an advantage over non-merged firms in the sense that the merged firms' expected cost is lower. I show that mergers occur if and only if the uncertainty is large and that the larger the uncertainty, the greater the number of firms that will merge. Although a merger reduces competition and therefore hurts consumers, it improves productivity under cost uncertainty. I find that a merger increases social welfare whenever there are at least four firms in the industry before the merger.

Suggested Citation

  • Zhou, Wen, 2008. "Endogenous horizontal mergers under cost uncertainty," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 903-912, July.
  • Handle: RePEc:eee:indorg:v:26:y:2008:i:4:p:903-912
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    Cited by:

    1. Le Pape, Nicolas & Zhao, Kai, 2014. "Horizontal mergers and uncertainty," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW), vol. 8, pages 1-31.
    2. Petrakis, Emmanuel & Manasakis, C. & Cabolis, C. & Moreno, Diego, 2016. "R&D investments fostering horizontal mergers," UC3M Working papers. Economics 23280, Universidad Carlos III de Madrid. Departamento de Economía.
    3. Gordon M. Phillips & Alexei Zhdanov, 2013. "R&D and the Incentives from Merger and Acquisition Activity," Review of Financial Studies, Society for Financial Studies, vol. 26(1), pages 34-78.
    4. Onur A. Koska & Frank Stähler, 2014. "Optimal Acquisition Strategies in Unknown Territories," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 170(3), pages 406-426, September.
    5. Omkar D. Palsule-Desai, 2016. "Impact of equity and equality on stability and collusion in a decentralized network," Annals of Operations Research, Springer, vol. 238(1), pages 411-447, March.
    6. Mariana Cunha & Paula Sarmento & Hélder Vasconcelos, 2014. "Uncertain Efficiency Gains and Merger Policy," FEP Working Papers 527, Universidade do Porto, Faculdade de Economia do Porto.
    7. Omkar Palsule-Desai, 2016. "Impact of equity and equality on stability and collusion in a decentralized network," Annals of Operations Research, Springer, vol. 238(1), pages 411-447, March.
    8. Zhu, Jing & Boyaci, Tamer & Ray, Saibal, 2016. "Effects of upstream and downstream mergers on supply chain profitability," European Journal of Operational Research, Elsevier, vol. 249(1), pages 131-143.

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