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When Efficient Firms Flock Together: Merger Incentives Under Yardstick Competition

Author

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  • Jonas Teusch

    (University of Liege
    Université catholique de Louvain)

Abstract

Local monopolists that are regulated by yardstick competition frequently merge with their peers. However, economic theory provides little guidance for merger analysis. In contrast, the theoretical model in this article shows that there can be room for strategic firm behaviour even in a setting where firms are many and collusion is not sustainable. Specifically, the article derives conditions under which firms propose welfare-decreasing mergers to avoid competition with efficient peers and establishes when peer effects discourage firms from implementing socially desirable mergers. Efficient peers flock together whereas inefficient firms remain independent, unless peer effects are counteracted by efficiency effects.

Suggested Citation

  • Jonas Teusch, 2019. "When Efficient Firms Flock Together: Merger Incentives Under Yardstick Competition," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 55(2), pages 237-255, September.
    • Handle: RePEc:kap:revind:v:55:y:2019:i:2:d:10.1007_s11151-018-9670-8
    DOI: 10.1007/s11151-018-9670-8
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    More about this item

    Keywords

    Yardstick competition; Merger analysis; Incentive regulation;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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