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Uncertain Efficiency Gains and Merger Policy

Listed author(s):
  • Mariana Cunha

    ()

    (FEP-UP, School of Economics and Management, University of Porto)

  • Paula Sarmento

    ()

    (FEP-UP, CEF-UP)

  • Hélder Vasconcelos

    ()

    (FEP-UP, CEF-UP, CEPR)

This paper studies the role of uncertainty in merger control and in merger decisions. In a Cournot setting, we consider that mergers may give rise to uncertain endogenous efficiency gains and that every merger has to be submitted for approval to the Antitrust Authority (AA). We assume that both the AA and the firms in the industry face the same uncertainty about the future efficiency gains induced by the merger. It is shown that an increase in the degree of uncertainty benefits both insider and outsider firms but also the consumers. Further, when uncertainty is high, there is a greater likelihood that firms propose a merger to the AA and that the AA accepts it. Interestingly, however, although uncertainty enhances merger approval chances, it also decreases merger's stability, by increasing outsiders' incentives to free-ride on it.

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File URL: http://www.fep.up.pt/investigacao/workingpapers/wp527.pdf
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Paper provided by Universidade do Porto, Faculdade de Economia do Porto in its series FEP Working Papers with number 527.

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Length: 24 pages
Date of creation: Mar 2014
Handle: RePEc:por:fepwps:527
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  1. Gal-Or, Esther, 1988. "The Informational Advantages or Disadvantages of Horizontal Mergers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(4), pages 639-661, November.
  2. Li, Lode., 1985. "Cournot Oligopoly with Information Sharing," Working Papers 561, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Carl Shapiro, 1986. "Exchange of Cost Information in Oligopoly," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 433-446.
  4. Sakai, Yasuhiro, 1985. "The value of information in a simple duopoly model," Journal of Economic Theory, Elsevier, vol. 36(1), pages 36-54, June.
  5. Esther Gal-or, 1986. "Information Transmission—Cournot and Bertrand Equilibria," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 85-92.
  6. Motta, Massimo & Vasconcelos, Helder, 2004. "Efficiency Gains and Myopic Antitrust Authority in a Dynamic Merger Game," CEPR Discussion Papers 4175, C.E.P.R. Discussion Papers.
  7. William Novshek & Hugo Sonnenschein, 1982. "Fulfilled Expectations Cournot Duopoly with Information Acquisition and Release," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 214-218, Spring.
  8. Volker Nocke & Michael D. Whinston, 2008. "Dynamic Merger Review," NBER Working Papers 14526, National Bureau of Economic Research, Inc.
  9. Cosnita, A. & Tropeano, J.P., 2008. "Negotiating remedies : revealing the merger efficiency gains," Working Papers 200803, Grenoble Applied Economics Laboratory (GAEL).
  10. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
  11. Zhou, Wen, 2008. "Endogenous horizontal mergers under cost uncertainty," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 903-912, July.
  12. Xavier Vives, 2002. "Private Information, Strategic Behavior, and Efficiency in Cournot Markets," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 361-376, Autumn.
  13. AMIR, Rabah & DIAMANTOUDI, Effrosyni & XUE, Licun, 2008. "Merger Performance under Uncertain Efficiency Gains," Cahiers de recherche 09-2008, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  14. Besanko, David & Spulber, Daniel F, 1993. "Contested Mergers and Equilibrium Antitrust Policy," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(1), pages 1-29, April.
  15. Neven, Damien J & Röller, Lars-Hendrik, 2000. "Consumer Surplus vs. Welfare Standard in a Political Economy Model of Merger Control," CEPR Discussion Papers 2620, C.E.P.R. Discussion Papers.
  16. Lars-Hendrik Röller & Johan Stennek & Frank Verboven, 2006. "Efficiency Gains from Mergers," Chapters, in: European Merger Control, chapter 3 Edward Elgar Publishing.
  17. Horn, Henrik & Persson, Lars, 1999. "The Equilibrium Ownership of an International Oligopoly," Working Paper Series 515, Research Institute of Industrial Economics.
  18. Qiu, Larry D. & Zhou, Wen, 2006. "International mergers: Incentives and welfare," Journal of International Economics, Elsevier, vol. 68(1), pages 38-58, January.
  19. Helder Vasconcelos, 2010. "Efficiency Gains And Structural Remedies In Merger Control," Journal of Industrial Economics, Wiley Blackwell, vol. 58(4), pages 742-766, December.
  20. Kit Pong Wong & Tse, Maurice K. S., 1997. "Mergers and investments in cost reduction with private information revisited," International Journal of Industrial Organization, Elsevier, vol. 15(5), pages 629-634, August.
  21. Le Pape, Nicolas & Zhao, Kai, 2013. "Horizontal mergers and uncertainty," Economics Discussion Papers 2013-62, Kiel Institute for the World Economy (IfW).
  22. Gal-Or, Esther, 1985. "Information Sharing in Oligopoly," Econometrica, Econometric Society, vol. 53(2), pages 329-343, March.
  23. Eleanor Morgan, 2001. "Innovation and Merger Decisions in the Pharmaceutical Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 19(2), pages 181-197, September.
  24. Raith, Michael, 1996. "A General Model of Information Sharing in Oligopoly," Journal of Economic Theory, Elsevier, vol. 71(1), pages 260-288, October.
  25. Jovanovic, Dragan & Wey, Christian, 2012. "An equilibrium analysis of efficiency gains from mergers," DICE Discussion Papers 64, Düsseldorf Institute for Competition Economics (DICE), University of Düsseldorf.
  26. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-227, March.
  27. Richard N. Clarke, 1983. "Collusion and the Incentives for Information Sharing," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 383-394, Autumn.
  28. Stenbacka, L. Rune, 1991. "Mergers and investments in cost reduction with private information," International Journal of Industrial Organization, Elsevier, vol. 9(3), pages 397-405, September.
  29. Jensen, Richard, 1992. "Innovation Adoption and Welfare under Uncertainty," Journal of Industrial Economics, Wiley Blackwell, vol. 40(2), pages 173-180, June.
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