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Merger wave in a small world: Two views

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  • Lee, Li Way

Abstract

I attempt a more balanced assessment of mergers in terms of systemic risk versus other effects. First, using the simplest network model, I illustrate how mergers can increase systemic risk by reducing the degree of separation among firms. Then, recasting the firms in a simple economic model that features consumers explicitly, I show how a merger wave – a contagious urge to merge – can occur and what benefit it may bring to consumers. Together, these two models suggest that there is a tradeoff to consider: While a merger wave may result in higher systemic risk, it may also bring about higher consumer welfare.

Suggested Citation

  • Lee, Li Way, 2013. "Merger wave in a small world: Two views," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 43(C), pages 68-71.
    • Handle: RePEc:eee:soceco:v:43:y:2013:i:c:p:68-71
    DOI: 10.1016/j.socec.2013.01.009
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    References listed on IDEAS

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    4. Stefania Vitali & James B Glattfelder & Stefano Battiston, 2011. "The Network of Global Corporate Control," PLOS ONE, Public Library of Science, vol. 6(10), pages 1-6, October.
    5. Scherer, F. M., 2010. "A Perplexed Economist Confronts 'Too Big to Fail'," Working Paper Series rwp10-007, Harvard University, John F. Kennedy School of Government.
    6. Scherer, Frederic Michael, 2010. "A Perplexed Economist Confronts 'Too Big to Fail'," Scholarly Articles 4454151, Harvard Kennedy School of Government.
    7. Andrew G. Haldane & Robert M. May, 2011. "Systemic risk in banking ecosystems," Nature, Nature, vol. 469(7330), pages 351-355, January.
    8. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
    9. Hay, D A, 1976. "Sequential Entry and Entry-Deterring Strategies in Spatial Competition," Oxford Economic Papers, Oxford University Press, vol. 28(2), pages 240-257, July.
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    Cited by:

    1. Hou, Rui & Yang, Jianmei & Yao, Canzhong & McKelvey, Bill, 2015. "How does competition structure affect industry merger waves? A network analysis perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 140-156.

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    More about this item

    Keywords

    Merger wave; Small world; Financial network; Merger contagion; Systemic risk; Product differentiation;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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