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Nonparametric measurement of potential gains from mergers: an additive decomposition and application to Indian bank mergers

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  • Subhash C. Ray

    (University of Connecticut)

  • Shilpa Sethia

Abstract

In this paper, we derive conditions under which merger between a number of firms within the same industry would induce a more cost efficient production of the aggregate output bundle, especially in the short-run, and show that potential cost economies from a merger can be attributed to three factors: convexity of the technology, sub-additivity of the ray short-run total cost curve, and a trade-off between reduction in the variable cost and increase in fixed cost arising from an aggregation of the fixed inputs of the merging units. We use this proposed analytical framework to evaluate the gains from various recent bank mergers in India. We employ the nonparametric method of Data Envelopment Analysis for retrospectively quantifying the potential gain from specific mergers and its components both in the short-run and in the long-run.

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  • Subhash C. Ray & Shilpa Sethia, 2022. "Nonparametric measurement of potential gains from mergers: an additive decomposition and application to Indian bank mergers," Journal of Productivity Analysis, Springer, vol. 57(2), pages 115-130, April.
    • Handle: RePEc:kap:jproda:v:57:y:2022:i:2:d:10.1007_s11123-021-00625-w
    DOI: 10.1007/s11123-021-00625-w
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    More about this item

    Keywords

    Sub-additivity; Ray average cost; DEA; Indian banking;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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