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On Cooperation Through Alliances and Mergers

Manel Antelo and David Peón ()
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Manel Antelo: Universidade de Santiago de Compostela
David Peón: University of A Coruna

Journal of Industry, Competition and Trade, 2019, vol. 19, issue 2, 263-279

Abstract: Abstract This paper examines the profitability of alliances and mergers as strategic substitutes for entrepreneurial firms to obtain a cost-cutting advantage. In a Cournot oligopoly with linear demand, constant marginal costs and a subset of firms choosing whether to ally or merge, the preference of a device or the other depends on the number of firms in the industry, their efficiency degree before the agreement, the number of collaborating firms, and the amount of cost saving achieved by the agreement. In general, given the number of firms in the market, an alliance is preferred when the cost-cutting achieved is large and a merge when it is low. Consumers, on the other hand, are always better with an alliance than with a merger. Finally, when aggregate welfare is considered, we characterize the scenarios where socially inefficient mergers or alliances would be implemented. We also discuss two assumptions of the model that might lead to the result that alliances are preferred the more competitors in the industry—a paradox that contradicts the basic tenets of industrial organization theory.

Keywords: Entrepreneurial firms; Mergers; Alliances; Corporate management (search for similar items in EconPapers)
JEL-codes: G34 D02 L13 (search for similar items in EconPapers)
Date: 2019
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