CAPACITY CONSTRAINT, MERGER PARADOX AND WELFARE-IMPROVING PRO-MERGER POLICY

Baomin Dong, Guixia Guo, Xiaolin Qian and Frank Yong Wang

Hitotsubashi Journal of Economics, 2016, vol. 57, issue 1, 1-26

Abstract: In this paper, we show that the "Merger Paradox" (Salant, Switzer and Reynolds, 1983) is mitigated when capacity constraint is considered. This is because outside firms who do not participate in a merger cannot expand their output beyond their existing capacity, and therefore, Stigler type of free riding is alleviated. When overcapacity is socially costly, it is also shown that a pro-merger fiscal policy may discourage ex ante capacity investment and hence alleviate overcapacity, if capacity building is not too costly. Furthermore, it can be shown that the optimal pro-merger subsidy is always welfare improving when it discourages capacity building.

Keywords: capacity constraint; merger paradox; overcapacity (search for similar items in EconPapers)
JEL-codes: C72 D24 L41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitjec:v:57:y:2016:i:1:p:1-26

DOI: 10.15057/27944

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