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Implications of Unprofitable Horizontal Mergers: A Positive External Effect does not Suffice to Clear a Merger!

Author

Listed:
  • Oliver Budzinski

    () (Department of Environmental and Business Economics, University of Southern Denmark)

  • Jürgen-Peter Kretschmer

    () (Economic Policy Unit, Philipps-University of Marburg, Germany)

Abstract

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. We thank all participants of the 29th HOS Conference (Marburg, November 2007), the 35th EARIE Conference (Toulouse, September 2008) and the Annual Meeting of the Verein für Socialpolitik (Graz, September 2008) for a valuable and helpful discussion of this paper. Furthermore, we thank Barbara Güldenring for editorial assistance.

Suggested Citation

  • Oliver Budzinski & Jürgen-Peter Kretschmer, 2009. "Implications of Unprofitable Horizontal Mergers: A Positive External Effect does not Suffice to Clear a Merger!," Working Papers 84/09, University of Southern Denmark, Department of Sociology, Environmental and Business Economics.
  • Handle: RePEc:sdk:wpaper:84
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    References listed on IDEAS

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    Cited by:

    1. Joel Stiebale & Michaela Trax, 2011. "The effects of cross-border M&As on the acquirers' domestic performance: firm-level evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 44(3), pages 957-990, August.

    More about this item

    Keywords

    Oligopoly theory; horizontal merger policy; profitability of mergers; antitrust;

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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