Mergers with Product Market Risk

Marco Ottaviani and Albert Banal-Estanol

No 4831, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper studies the private incentives and the social effects of horizontal mergers among risk-averse firms. In our model, merging firms are allowed to choose how to split their joint profits, with implications for risk sharing and strategic behaviour in the product market. If firms compete in quantities, consolidation makes firms more aggressive due to improved risk sharing. Mergers involving few firms are then profitable with a relatively small level of risk aversion. With strong enough risk aversion, mergers result in lower prices and higher social welfare. If firms instead compete in prices, consumers do not benefit from mergers with demand uncertainty, but can easily benefit in markets with cost uncertainty.

Keywords: Oligopoly; Market imperfection; Mergers and acquisitions; Monopolization and horizontal anticompetitive practices (search for similar items in EconPapers)
JEL-codes: D43 G34 L41 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-com, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Mergers with Product Market Risk (2006)
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