PART IV MARKET STRUCTURE IV.2 MERGERS

PART IV MARKET STRUCTURE

IV.2 MERGERS

- Financial motives

- Strategic motives

- Horizontal mergers

- Aim:

! Increase efficiency (+)

! Increase market power (-)

!

IV.2.1 HORIZONTAL MERGERS

- Stigler: Firms that benefit from merger are those that do not merge

- Those that merge decrease their market power

- Proof of increased efficiency?

! Δ Total Surplus

= Δ Π + Δ CS

= Δ Π (firms that merge) + Δ Π (firms that do not merge) + Δ CS

> or < 0 ?

From a policy perspective

- Difficult to measure the efficiency gains

- Especially where there is asymmetric information about these

Formal illustration

The model

- Cost function: C(q) = F + cq

- Demand function: P = a – bQ

- Total quantity: Q = Σ q

- Competition à la Cournot

The equilibrium

With n firms With n - 1 firms

€

Π

(n) = 1 b

a − c n + 1

⎛

⎝ ⎜ ⎞

⎠ ⎟

2

− F

€

Π

(n −1) = 1 b

a − c n

⎛

⎝ ⎜ ⎞

⎠ ⎟

2

− F

€

SC(n) = n

2b

a − c n + 1

⎛

⎝ ⎜ ⎞

⎠ ⎟

2

€

SC(n − 1) = (n − 1)

2b

a − c n

⎛

⎝ ⎜ ⎞

⎠ ⎟

2

€

TS(n) = n(n + 2) 2b

a − c n +1

⎛

⎝ ⎜ ⎞

⎠ ⎟

2

− nF

€

TS(n − 1) = (n

− 1) 2b

a − c n

⎛

⎝ ⎜ ⎞

⎠ ⎟

2

− (n − 1)F

- The merger occurs if

!

€

2Π

(n) < Π

(n − 1) ⇔ F ≥ (a − c)

(n

− 2n − 1)

bn

(n + 1)

= F ˜

- The merger is socially profitable if

!

€

TS(n) < TS(n − 1) ⇔ F ≥ (a − c)

(n + 0.5)

bn

(n + 1)

= F ˜

- It is easy to show that

€

F ˜

< F ˜

- To sum up:

! For low levels of F, a merger is neither voluntary nor socially profitable

! For intermediate levels of F, a merger is voluntary but not socially profitable

! For high levels of F, a merger is both voluntary and socially profitable