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Efficient Horizontal Mergers: The Effects of Internal Capital Reallocation and Organizational Form

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  • Sue Mialon

Abstract

This paper provides a theoretical ratification of efficiency of internal capital markets. The efficiency of internal capital market is examined in the context of horizontal mergers. In Cournot oligopoly, merged firms often optimally select the multidivisional structure in which competition among the merging partners remains in production while the headquarters establishes strong central control over resource allocation to the divisions. Under this structure, mergers not only combine the merging partners' capital, but also provide the merged firm with a new opportunity to reallocate that capital in an efficient way. Horizontal mergers are profitable due to the efficiency of internal capital markets. Such horizontal mergers also enhance market competition. I discuss the conditions under which the multidivisional structure (the M-form) is optimal for the merged firm while complete fusion of all the merging partners under a single authority is also feasible.

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  • Sue Mialon, 2005. "Efficient Horizontal Mergers: The Effects of Internal Capital Reallocation and Organizational Form," Emory Economics 0522, Department of Economics, Emory University (Atlanta).
  • Handle: RePEc:emo:wp2003:0522
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    Cited by:

    1. Amir, Rabah & Diamantoudi, Effrosyni & Xue, Licun, 2009. "Merger performance under uncertain efficiency gains," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 264-273, March.
    2. Han, Aiping & Ge, Jianping & Lei, Yalin, 2016. "Vertical vs. horizontal integration: Game analysis for the rare earth industrial integration in China," Resources Policy, Elsevier, vol. 50(C), pages 149-159.
    3. Sue H. Mialon, 2014. "Product Bundling And Incentives For Mergers And Strategic Alliances," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 562-575, April.
    4. Heywood, John S. & McGinty, Matthew, 2011. "Cross-border mergers in a mixed oligopoly," Economic Modelling, Elsevier, vol. 28(1), pages 382-389.
    5. Thomas Giebe & Miyu Lee, 2015. "Competitors In Merger Control: Shall They Be Merely Heard Or Also Listened To?," SFB 649 Discussion Papers SFB649DP2015-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    6. Jie Wu & Qingyuan Zhu & Wade D Cook & Joe Zhu, 2016. "Best cooperative partner selection and input resource reallocation using DEA," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 67(9), pages 1221-1237, September.

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