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Does environmental regulation create merger incentives?

Anna Creti and María-Eugenia Sanin
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Anna Creti: Dauphine University and Ecole Polytechnique
María-Eugenia Sanin: EPEE, Evry-Val-d'Esssone University and Ecole Polytechnique

No 16-07, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: This paper studies merger incentives for polluting Cournot firms under a competitive tradable emission permits market. Such setting is relevant to assess the observed mergers between power generators in the Regional Greenhause Gas Initiative (RGGI) allowing us to derive policy recommendations. We find that when firms are symmetric and marginal costs are constant, an horizontal merger that generates efficiency gains is welfare enhancing, but efficiency gains must be high enough with respect to the case without permits markets for the merger to take place. Secondly, the presence of a competitive (or monopolistic) outside market that also trades in the permits market makes profitable a merger that would not happen otherwise. When firms are vertically related in an input-output chain, an horizontal merger in one of the markets increases profits in that market and in the other market due to the decrease in permits price. Finally we consider an oligopoly-fringe model in which firms differ both in their marginal costs of production and in their pollution intensity. A merger between the oligopolistic firms decreases permits price and is always profitable as opposed to the symmetric Cournot case in which there is a critical size for profitability.

Keywords: mergers; environmental externality; tradable emission permits; social welfare; Cournot competition (search for similar items in EconPapers)
JEL-codes: L13 L41 Q51 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2016
New Economics Papers: this item is included in nep-com, nep-ene, nep-env, nep-ind, nep-reg and nep-res
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