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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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    1. Stefania Vitali & James B. Glattfelder & Stefano Battiston, 2011. "The network of global corporate control," Papers 1107.5728, arXiv.org, revised Sep 2011.
    2. B. Curtis Eaton & Richard G. Lipsey, 1975. "The Principle of Minimum Differentiation Reconsidered: Some New Developments in the Theory of Spatial Competition," Review of Economic Studies, Oxford University Press, vol. 42(1), pages 27-49.
    3. 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.
    4. 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.
    5. F. M. Scherer, 2010. "A Perplexed Economist Confronts 'too Big to Fail'," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 7(2), pages 267-284, December.
    6. Scherer, Frederic Michael, 2010. "A Perplexed Economist Confronts 'Too Big to Fail'," Scholarly Articles 4454151, Harvard Kennedy School of Government.
    7. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
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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.

    More about this item

    Keywords

    Merger wave; Small world; Financial network; Merger contagion; Systemic risk; Product differentiation;

    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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