EX POST MERGER EVALUATIONS AND STRATEGIC PRE-MERGER INVESTMENTS

Richard Friberg, Pehr-Johan Norbäck and Lars Persson

Journal of Competition Law and Economics, 2012, vol. 8, issue 4, 831-848

Abstract: We present a model that warns against a mechanical comparison of pre- and post-merger prices. The starting point of the article is that both the seller and the buyer take into account how the acquisition price is affected by pre-merger investments. We derive conditions under which the selling of a firm triggers overinvestment by both the acquirer and the target. Under Cournot competition, linear demand, and quadratic investment costs, we show that these incentives to overinvest can lead to a lower price in a post-acquisition duopoly than in an ongoing triopoly. This finding suggests a backward-looking efficiency defense in the merger control.

JEL-codes: L13 L40 L66 (search for similar items in EconPapers)
Date: 2012
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