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Implications of Unprofitable Horizontal Mergers: A Re-Interpretation of the Farrell-Shapiro-Framework

  • Oliver Budzinski

    ()

    (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)

  • Jürgen-Peter Kretschmer

    ()

    (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)

We demonstrate that the popular Farrell-Shapiro-framework (FSF) for the analysis of mergers in oligopolies relies regarding its policy conclusions sensitively on the assumption that rational agents will only propose privately profitable mergers. If this assumption held, a positive external effect of a proposed merger would represent a sufficient condition to allow the merger. However, the empirical picture on mergers and acquisitions reveals a significant share of unprofitable mergers and economic theory, moreover, demonstrates that privately unprofitable mergers can be the result of rational action. Therefore, we extend the FSF by explicitly allowing for unprofitable mergers to occur with some frequency. This exerts a considerable impact on merger policy conclusions: while several insights of the original FSF are corroborated (f.i. efficiency defence), a positive external effect does not represent a sufficient condition for the allowance of a merger anymore. Applying such a rule would cause a considerable amount of false positives. In addition, we conclude that the FSF need to be explicitly complemented by a freedom of competition principle in order to make it workable as a basis for an economics-based merger policy.

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Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series Marburg Working Papers on Economics with number 200714.

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Length: 20 pages
Date of creation: 2007
Date of revision:
Publication status: Forthcoming in
Handle: RePEc:mar:volksw:200714
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