Unprofitable horizontal mergers, external effects, and welfare

Oliver Budzinski and Jürgen-Peter Kretschmer

No 96, Ilmenau Economics Discussion Papers from Ilmenau University of Technology, Institute of Economics

Abstract: Standard analysis of mergers in oligopolies along the lines of the popular Farrell-Shapiro-Framework (FSF) relies regarding its policy conclusions sensitively on the assumption that rational agents will only propose privately profitable mergers. If this assumption held, a positive external effect of a proposed merger would represent a sufficient condition to allow the merger. However, the empirical picture on mergers and acquisitions reveals a significant share of unprofitable mergers and economic theory, moreover, demonstrates that privately unprofitable mergers can be the result of rational action. Therefore, we drop this restrictive assumption and allow for unprofitable mergers to occur. This exerts a considerable impact on merger policy conclusions: while several insights of the original analysis are corroborated (f.i. efficiency defence), a positive external effect does not represent a sufficient condition for the allowance of a merger anymore. Applying such a rule would cause a considerable amount of false decisions.

Keywords: mergers & acquisitions; oligopoly theory; horizontal merger policy; profitability of mergers; antitrust (search for similar items in EconPapers)
JEL-codes: D43 K21 L13 L41 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-com, nep-ger, nep-ind and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/142321/1/837605725.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuiedp:96

Access Statistics for this paper

More papers in Ilmenau Economics Discussion Papers from Ilmenau University of Technology, Institute of Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().