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Dynamics of mergers, bifurcation and chaos: A new framework

  • Gangopadhyay, Partha

This paper is motivated by a gap in the existing literature on mergers since no attempt has been successfully made to consider endogenous multiple mergers that trigger reciprocal mergers, which in turn fuel further mergers and the process continues ad infinitum. The precise contribution of this paper is to model endogenous mergers such that groups of firms simultaneously decide whether to merge, or not, when their rivals decide to merge. We call this type of mergers endogenously-driven-reciprocal (EDR) mergers. We develop a framework to examine endogenously-driven-reciprocal mergers to establish that fluctuations in merger activities can be explained in a purely endogenous manner, without resorting to any ad hoc stochastic specifications. Our principal finding therefore is that complicated random looking sequences of mergers and merger waves might even prevail in deterministic models, under a reasonable condition. We then extend the model to include U-shaped cost functions and non-pecuniary goals of managers to establish the existence of multiple merger equilibria, which can cause a serious indeterminacy, historical lock-in and path dependency in the context of endogenously-driven-reciprocal mergers. We further show how multiplicity of merger equilibrium and bifurcations of these equilibria can lend fragility to the industrial system.

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Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 403 (2014)
Issue (Month): C ()
Pages: 293-307

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Handle: RePEc:eee:phsmap:v:403:y:2014:i:c:p:293-307
DOI: 10.1016/j.physa.2014.02.024
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  9. Vives, Xavier, 1990. "Nash equilibrium with strategic complementarities," Journal of Mathematical Economics, Elsevier, vol. 19(3), pages 305-321.
  10. Straume, Odd Rune, 2003. "International mergers and trade liberalisation: implications for unionised labour," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 717-735, May.
  11. Damien J. Neven & Lars-Hendrik Röller, 2000. "Consumer Surplus vs. Welfare Standard in a Political Economy Model of Merger Control," CIG Working Papers FS IV 00-15, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
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  16. 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).
  17. Benhabib, Jess & Day, Richard H., 1980. "Erratic accumulation," Economics Letters, Elsevier, vol. 6(2), pages 113-117.
  18. Nocke, Volker & Whinston, Michael, 2008. "Dynamic Merger Review," CEPR Discussion Papers 7077, C.E.P.R. Discussion Papers.
  19. Banal-Estanol, Albert & Macho-Stadler, Ines & Seldeslachts, Jo, 2008. "Endogenous mergers and endogenous efficiency gains: The efficiency defence revisited," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 69-91, January.
  20. Raphael Thomadsen & Ki-Eun Rhee, 2007. "Costly Collusion in Differentiated Industries," Marketing Science, INFORMS, vol. 26(5), pages 660-665, 09-10.
  21. Melicher, Ronald W & Ledolter, Johannes & D'Antonio, Louis J, 1983. "A Time Series Analysis of Aggregate Merger Activity," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 423-30, August.
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  23. Nilssen, T. & Sogard, L., 1995. "Sequential Horizontal Mergers," Papers 04-95, Norwegian School of Economics and Business Administration-.
  24. Rand, David, 1978. "Exotic phenomena in games and duopoly models," Journal of Mathematical Economics, Elsevier, vol. 5(2), pages 173-184, September.
  25. William F. Shughart II & Robert D. Tollison, 1984. "The Random Character of Merger Activity," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 500-509, Winter.
  26. Besanko, David & Spulber, Daniel F, 1993. "Contested Mergers and Equilibrium Antitrust Policy," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(1), pages 1-29, April.
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