LARGE IS BEAUTIFUL: HORIZONTAL MERGERS FOR BETTER EXPLOITATION OF PRODUCTION SHOCKS -super-*

Wen Zhou

Journal of Industrial Economics, 2008, vol. 56, issue 1, pages 68-93

Abstract: The profitability of horizontal mergers is investigated in a situation in which firms face a production shock and therefore are uncertain about their future costs. I show that, due to production rationalization, small-scale mergers can be profitable if the uncertainty is large. The efficiency gain in production also implies benign welfare consequences. Under cost uncertainty, a profitable merger always improves social welfare if no more than half of the industry's firms are allowed to merge. Finally, I show that the incentives to merge depend on the information structure. Firms are less likely to merge when they possess more information. Copyright 2008 The Author.

Date: 2008

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Journal of Industrial Economics is edited by Pierre Regibeau, Yeon-Koo Che, Kenneth Corts, Thomas Hubbard, Patrick Legros and Frank Verboven

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