Mergers and Deterrence

Daniel Richards ()

The B.E. Journal of Economic Analysis & Policy, 2003, vol. 3, issue 1, 1-18

Abstract: Changes in technology or policy create opportunities for industry restructuring and are frequently accompanied by both numerous mergers and potential entry. In the case of mergers, the combining firms have inside information regarding the strength of the surviving entity. In turn, such strength may be signaled to potential rivals or entrants by means of the acquisition price paid for the target firm. A pooling equilibrium is then possible in which even weak mergers are associated with a high acquisition price meant to deter post-merger rival aggression. The implications of such strategic behavior are consistent with much empirical evidence on mergers.

Date: 2003
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DOI: 10.2202/1538-0653.1122

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