Multidivisional firms, internal competition, and the merger paradox

Anthony Creane and Carl Davidson ()

Canadian Journal of Economics, 2004, vol. 37, issue 4, 951-977

Abstract: Traditional modelling of mergers has the merged firms (insiders) cooperate and maximize joint profits. This approach has several unappealing results in quantity-setting games, for example, mergers typically are not profitable for insiders, but are profitable for non-merging firms (outsiders). We take a different approach and allow for a parent company that can play each insider off one another. In quantity-setting games, with our approach mergers are profitable for insiders, unprofitable for outsiders, socially beneficial, and involve (in a non-monopolizing merger) a small number of firms. Finally, we find that the optimal strategy depends on whether firms compete in quantity or prices.

JEL-codes: L0 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (54)

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