IDEAS home Printed from https://ideas.repec.org/p/zbw/tuiedp/96.html
   My bibliography  Save this paper

Unprofitable horizontal mergers, external effects, and welfare

Author

Listed:
  • Budzinski, Oliver
  • Kretschmer, Jürgen-Peter

Abstract

Standard analysis of mergers in oligopolies along the lines of the popular Farrell-Shapiro-Framework (FSF) 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 drop this restrictive assumption and allow for unprofitable mergers to occur. This exerts a considerable impact on merger policy conclusions: while several insights of the original analysis 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 decisions.

Suggested Citation

  • Budzinski, Oliver & Kretschmer, Jürgen-Peter, 2015. "Unprofitable horizontal mergers, external effects, and welfare," Ilmenau Economics Discussion Papers 96, Ilmenau University of Technology, Institute of Economics.
    • Handle: RePEc:zbw:tuiedp:96
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/142321/1/837605725.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lars-Hendrik Röller & Johan Stennek & Frank Verboven, 2006. "Efficiency Gains from Mergers," Chapters, in: Fabienne IIzkovitz & Roderick Meiklejohn (ed.), European Merger Control, chapter 3, Edward Elgar Publishing.
    2. Cheung, Francis K., 1992. "Two remarks on the equilibrium analysis of horizontal merger," Economics Letters, Elsevier, vol. 40(1), pages 119-123, September.
    3. Michael Firth, 1980. "Takeovers, Shareholder Returns, and the Theory of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 235-260.
    4. Spector, David, 2003. "Horizontal mergers, entry, and efficiency defences," International Journal of Industrial Organization, Elsevier, vol. 21(10), pages 1591-1600, December.
    5. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    6. Gunther Tichy, 2001. "What Do We Know about Success and Failure of Mergers?—Rejoinder," Journal of Industry, Competition and Trade, Springer, vol. 1(4), pages 431-440, December.
    7. William Novshek, 1985. "On the Existence of Cournot Equilibrium," Review of Economic Studies, Oxford University Press, vol. 52(1), pages 85-98.
    8. Oliver Budzinski, 2003. "Cognitive Rules, Institutions, and Competition," Constitutional Political Economy, Springer, vol. 14(3), pages 213-233, September.
    9. David Hennessy, 2000. "Cournot Oligopoly Conditions under which Any Horizontal Merger Is Profitable," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 17(3), pages 277-284, November.
    10. Gugler, Klaus & Mueller, Dennis C. & Yurtoglu, B. Burcin & Zulehner, Christine, 2003. "The effects of mergers: an international comparison," International Journal of Industrial Organization, Elsevier, vol. 21(5), pages 625-653, May.
    11. Fabienne Ilzkovitz & Roderick Meiklejohn, 2006. "European Merger Control: Do We Need an Efficiency Defence?," Chapters, in: Fabienne IIzkovitz & Roderick Meiklejohn (ed.), European Merger Control, chapter 2, Edward Elgar Publishing.
    12. Levin, Dan, 1990. "Horizontal Mergers: The 50-Percent Benchmark," American Economic Review, American Economic Association, vol. 80(5), pages 1238-1245, December.
    13. Budzinski Oliver & Kuchinke Björn A., 2012. "Deal or No Deal? Consensual Arrangements as an Instrument of European Competition Policy," Review of Economics, De Gruyter, vol. 63(3), pages 265-292, December.
    14. Nilssen, Tore & Sorgard, Lars, 1998. "Sequential horizontal mergers," European Economic Review, Elsevier, vol. 42(9), pages 1683-1702, November.
    15. Brueckner, Jan K. & Spiller, Pablo T., 1991. "Competition and mergers in airline networks," International Journal of Industrial Organization, Elsevier, vol. 9(3), pages 323-342, September.
    16. Anju Seth, 1990. "Sources of value creation in acquisitions: An empirical investigation," Strategic Management Journal, Wiley Blackwell, vol. 11(6), pages 431-446, October.
    17. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    18. Barros, Pedro P. & Cabral, Luis, 1994. "Merger policy in open economies," European Economic Review, Elsevier, vol. 38(5), pages 1041-1055, May.
    19. Oliver Budzinski & Jürgen-Peter Kretschmer, 2009. "Horizontal Mergers, Involuntary Unemployment, and Welfare," Working Papers 90/09, University of Southern Denmark, Department of Sociology, Environmental and Business Economics.
    20. Daniel Kahneman, 2003. "A Psychological Perspective on Economics," American Economic Review, American Economic Association, vol. 93(2), pages 162-168, May.
    21. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
    22. Bruner, Robert F., 1988. "The Use of Excess Cash and Debt Capacity as a Motive for Merger," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(2), pages 199-217, June.
    23. Shleifer, Andrei & Vishny, Robert W, 1988. "Value Maximization and the Acquisition Process," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 7-20, Winter.
    24. Verboven, Frank, 1995. "Corporate restructuring in a collusive oligopoly," International Journal of Industrial Organization, Elsevier, vol. 13(3), pages 335-354, September.
    25. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    26. Farrell, Joseph & Shapiro, Carl, 1991. "Horizontal Mergers: Reply," American Economic Review, American Economic Association, vol. 81(4), pages 1007-1011, September.
    27. D. Dragone & L. Lambertini & A. Mantovani, 2006. "Horizontal Mergers with Scale Economies," Working Papers 571, Dipartimento Scienze Economiche, Universita' di Bologna.
    28. Kaplan, Steven N & Weisbach, Michael S, 1992. "The Success of Acquisitions: Evidence from Divestitures," Journal of Finance, American Finance Association, vol. 47(1), pages 107-138, March.
    29. Fridolfsson, Sven-Olof, 2007. "Anti- versus Pro-Competitive Mergers," Working Paper Series 694, Research Institute of Industrial Economics.
    30. Sven-Olof Fridolfsson & Johan Stennek, 2005. "Why Mergers Reduce Profits And Raise Share Prices-A Theory Of Preemptive Mergers," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1083-1104, September.
    31. Paolo Fulghieri & Laurie Simon Hodrick, 2006. "Synergies and Internal Agency Conflicts: The Double‐Edged Sword of Mergers," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(3), pages 549-576, September.
    32. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
    33. Gunther Tichy, 2001. "What Do We Know about Success and Failure of Mergers?," Journal of Industry, Competition and Trade, Springer, vol. 1(4), pages 347-394, December.
    34. Maryam Beigi & Oliver Budzinski, 2013. "Reservations on the use of event studies to evaluate economic policy," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 48(3), pages 174-179, May.
    35. Anonymous, 2009. "Abstract of the discussion," British Actuarial Journal, Cambridge University Press, vol. 15(1), pages 202-217, March.
    36. Raghavendra Rau, P. & Vermaelen, Theo, 1998. "Glamour, value and the post-acquisition performance of acquiring firms," Journal of Financial Economics, Elsevier, vol. 49(2), pages 223-253, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Oliver Budzinski & Jürgen-Peter Kretschmer, 2016. "Implications of Unprofitable Horizontal Mergers: A Positive External Effect Does Not Suffice To Clear A Merger!," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 10(1), March.
    2. Oliver Budzinski & Jürgen-Peter Kretschmer, 2007. "Implications of Unprofitable Horizontal Mergers: A Re-Interpretation of the Farrell-Shapiro-Framework," Marburg Working Papers on Economics 200714, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Martynova, M. & Renneboog, L.D.R., 2005. "Takeover Waves : Triggers, Performance and Motives," Discussion Paper 2005-029, Tilburg University, Tilburg Law and Economic Center.
    4. Jrisy Motis, 2007. "Mergers and Acquisitions Motives," Working Papers 0730, University of Crete, Department of Economics.
    5. Martynova, M., 2006. "The market for corporate control and corporate governance regulation in Europe," Other publications TiSEM 8651e281-4914-41f2-ac14-1, Tilburg University, School of Economics and Management.
    6. Ivaldi, Marc & Motis, Jrissy, 2007. "Mergers as Auctions," IDEI Working Papers 461, Institut d'Économie Industrielle (IDEI), Toulouse.
    7. Tomaso Duso & Damien J. Neven & Lars-Hendrik Röller, 2007. "The Political Economy of European Merger Control: Evidence using Stock Market Data," Journal of Law and Economics, University of Chicago Press, vol. 50(3), pages 455-489.
    8. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
    9. Walter Ferrarese, 2020. "When Multiple Merged Entities Lead in Stackelberg Oligopolies," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(1), pages 131-142, February.
    10. Dong, Yizhe & Li, Chang & Li, Haoyu, 2021. "Customer concentration and M&A performance," Journal of Corporate Finance, Elsevier, vol. 69(C).
    11. repec:zbw:bofrdp:2007_017 is not listed on IDEAS
    12. Joseph A. Clougherty & Tomaso Duso, 2010. "Using Rival Effects to Identify Synergies and Improve Merger Typologies," CIG Working Papers SP II 2010-13, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    13. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & Gilles Saint-Paul & Hans-Werner Sinn & John Kay & Jan-Egbert Sturm & Xavier Vives, 2006. "Chapter 5: Mergers and Competition Policy in Europe," EEAG Report on the European Economy, CESifo, vol. 0, pages 101-116, March.
    14. Sven-Olof Fridolfsson & Johan Stennek, 2005. "Why Mergers Reduce Profits And Raise Share Prices-A Theory Of Preemptive Mergers," Journal of the European Economic Association, MIT Press, vol. 3(5), pages 1083-1104, September.
    15. Jozsef Molnar, 2002. "Preemptive Horizontal Mergers: Theory and Evidence," CERS-IE WORKING PAPERS 0213, Institute of Economics, Centre for Economic and Regional Studies.
    16. James Gaisford & Stefan Lutz, 2007. "A Multi-Product Framework Generating Waves of Mergers and Divestitures," ICER Working Papers 36-2007, ICER - International Centre for Economic Research.
    17. Kamerbeek, S.P., 2009. "Merger Performance and Efficiencies in Horizontal Merger Policy in the US and the EU," MPRA Paper 18064, University Library of Munich, Germany.
    18. Utz Weitzel & Killian J. McCarthy, 2011. "Theory and evidence on mergers and acquisitions by small and medium enterprises," International Journal of Entrepreneurship and Innovation Management, Inderscience Enterprises Ltd, vol. 14(2/3), pages 248-275.
    19. Jozsef Molnar, 2002. "Preemptive Horizontal Mergers: Theory and Evidence," CERS-IE WORKING PAPERS 0213, Institute of Economics, Centre for Economic and Regional Studies.
    20. Gunther Tichy, 2001. "What Do We Know about Success and Failure of Mergers?," Journal of Industry, Competition and Trade, Springer, vol. 1(4), pages 347-394, December.
    21. Russell Pittman, 2007. "Consumer Surplus as the Appropriate Standard for Antitrust Enforcement," EAG Discussions Papers 200709, Department of Justice, Antitrust Division.

    More about this item

    Keywords

    mergers & acquisitions; oligopoly theory; horizontal merger policy; profitability of mergers; antitrust;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:tuiedp:96. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/ivtuide.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.