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The Effect of a Merger on Investments

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  • Motta, Massimo
  • Tarantino, Emanuele

Abstract

It has been suggested that mergers, by increasing profitability, will also result in higher investments. To deal with this claim, we first study a general model with simultaneous cost-reducing investments and price choices. Absent scope economies, the merger is anti-competitive: it lowers both total output and investment. With sequential choices, we provide a sufficient condition in a general model for the merger to be anti-competitive. The results are confirmed in a standard Shubik-Levitan parametric model. Only if the merger entails sufficient scope economies, will it be pro-competitive. We also show that a Network Sharing Agreement (by which parties set their investment cooperatively) is preferable to a merger. Finally, we identify a class of models where the same qualitative results extend to quality-enhancing investments.

Suggested Citation

  • Motta, Massimo & Tarantino, Emanuele, 2016. "The Effect of a Merger on Investments," CEPR Discussion Papers 11550, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11550
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    References listed on IDEAS

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    Cited by:

    1. Federico, Giulio & Langus, Gregor & Valletti, Tommaso, 2017. "A simple model of mergers and innovation," Economics Letters, Elsevier, vol. 157(C), pages 136-140.
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    3. Christos Genakos & Tommaso Valletti & Frank Verboven, 2018. "Evaluating market consolidation in mobile communications," Economic Policy, CEPR;CES;MSH, vol. 33(93), pages 45-100.

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    Keywords

    Horizontal mergers; innovation; Investments; Network-sharing Agreements;
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