Endogenous horizontal mergers under cost uncertainty

This paper presents a study of endogenous horizontal mergers under cost uncertainty. Before knowing the exact values of their costs, firms decide sequentially whether or not to join a merger. After the merger decision is made, uncertainty is resolved and firms engage in Cournot competition with incomplete information about one another's costs. Due to production rationalization, the merged firms enjoy an advantage over non-merged firms in the sense that the merged firms' expected cost is lower. I show that mergers occur if and only if the uncertainty is large and that the larger the uncertainty, the greater the number of firms that will merge. Although a merger reduces competition and therefore hurts consumers, it improves productivity under cost uncertainty. I find that a merger increases social welfare whenever there are at least four firms in the industry before the merger.     

On the competitive effects of vertical integration by a research laboratory

An independent research laboratory owns a patented process innovation ready to be used by an industry that produces differentiated goods. We analyze whether the laboratory prefers to license the innovation as an external patentee or to merge with one of the firms in the industry, licensing the innovation as an internal patentee. Under linear demand and Cournot competition, we show first, that the vertical merger is profitable only in the case of small innovations, whereas a merger increases welfare only for significant innovations; second, all profitable vertical mergers reduce welfare. However, some profitable mergers are welfare improving under price competition.     

Horizontal mergers and delegation

This paper shows that the profitability of merger in oligopoly is significantly enhanced if firms delegate the output decision to an agent and then motivate the latter using strategic rent shifting contracts. Two consequences of increased profitability are that the minimum market share that the merging parties require in order to merge profitably without efficiency gains, as well as the maximum market share that the merging parties can possess in order to guarantee that a profitable merger is welfare enhancing, are reduced. A third result is that delegation cannot reduce the set of endogenous mergers.     

Firm-specific time preferences and postmerger firm performance

This study investigates the role of firm-level discount factors in evaluating the impact of mergers on market outcomes. Discount factors reflect time preferences for future cash flows and are used to determine the present value of investment projects such as mergers. Firm-specific discount factors imply that firms may attach different present values to mergers. We elicit firm-specific time preferences and identify firms’ discount factors using firm-specific production data while building on the existence of learning-by-doing in the semiconductor industry. Our estimation results show that firm-specific discount factors explain firms’ production decisions. We also find that firms’ discount factors and merger acquisition strategies explain heterogeneous merger outcomes. Our results show that acquiring firms characterized by low discount factors (impatient firms) are highly efficient and merge with highly efficient and innovative firms. Impatient acquirers achieve relatively higher efficiency gains in the short run than patient acquirers and adopt acquisition strategies that put more weight on achieving instant efficiency gains. In contrast, patient acquirers are least efficient and merge with firms that are larger than themselves. Patient acquirers place more value on achieving efficiency gains in the more distant future.     

Technology of upstream firms and equilibrium product differentiation

Using a Hotelling-type product differentiation model (linear city model), we investigate the location strategies of upstream and downstream firms. We show that when transport costs of upstream firms are large, higher transport costs decrease the level of product differentiation of downstream firms. We also show that more inefficient transport technologies of upstream firms may enhance welfare. We briefly discuss vertical mergers and show that vertical mergers occur if the transport costs of upstream firms are large enough.     

Hold-up of anti-competitive mergers

We construct a model of endogenous mergers and study some issues of whether and how to control mergers, taking into account firms equilibrium response to policy. Anti-competitive mergers benefit competitors more than the merging firms. We show how such free-riding reduces firms incentives to merge (holdup). Firms delay merger proposals, hoping other firms will merge instead. The final result, however, is an overly concentrated market. Merger control may thus preserve competitive markets. In the presence of holdup, even reasonable policies such as requiring divestiture or using cost-benefit analysis, may be worse than not controlling mergers at all.     

Preemptive mergers under spatial competition

Mergers for market power generally benefit outsider firms more than participating firms. Hence, outsiders should welcome such mergers between their competitors but, frequently, this is not the case. Under spatial competition some outsiders gain more than the participating firms but others might benefit less. Thus, if the number of admissible mergers is limited, firms may decide to merge to preempt rival mergers. This paper studies the incentives for preemptive merger by firms engaged in spatial competition.     

Merger Incentives and the Failing Firm Defense

The merger incentives between profitable firms differ fundamentally from the incentives of a profitable firm to merge with a failing firm. We investigate these incentives under different modes of price competition and Cournot behavior. Our main finding is that firms strictly prefer exit of the failing firm to acquisition. This result may imply that other than strategic reasons, like economies of scale, must be looked for to understand why firms make use of the failing firm defense. However, when products are sufficiently heterogenous, we find that (i) the failing firm defense can be welfare enhancing and (ii) a government bail‐out increases total welfare when the number of firms is sufficiently low.     

MERGERS WITH SUPPLY FUNCTIONS

I analyze the equilibrium effects of a merger in an industry when firms compete by submitting supply functions. Under the assumptions that the industry capital stock is fixed and production costs are quadratic and decreasing in capital, I find that any merger results in all firms reducing supply. The decrease in supply by non-participating firms makes any merger profitable. A merger from a symmetric industry lowers welfare.     

Consumer surplus vs. welfare standard in a political economy model of merger control

This paper considers the political economy environment that an antitrust agency is operating in and asks under what circumstances a consumer surplus standard yields higher welfare than a welfare standard. In particular, we address how institutional settings—such as transparency and accountability—interact with the choice of an appropriate standard. We consider a framework in which the antitrust agency can be influenced by third parties (at a cost in terms of real resources) and in which the agency is imperfectly monitored. A welfare comparison between the two standards reveals that neither standard dominates. The consumer surplus standard is attractive relative to a welfare standard, when lobbying is efficient, when accountability is low, where mergers are large and when a marginal increase in merger size is highly profitable.     

The impact of firm cost and market size asymmetries on national mergers in a three-country model

This paper studies the impact of firm cost and market size asymmetries on merger decisions. I consider a model where a small and a large country compete in a third (world) market. Each of the two countries has two firms (with potentially different costs) that supply the domestic market and export to the third market. Merger decisions in the two countries are modeled as a simultaneously move game. The paper finds that firms in the large country have more incentives to merge than firms in the small country. In contrast, the government of the large country has more incentives to block a merger than the government of the small country. Thus, the model predicts that conflicts of interest between governments and firms concerning national mergers are more likely in large countries than in small ones.     

An equilibrium approach to international merger policy

I treat international merger policy as a repeated veto game. I show that there exists a unique efficient equilibrium within a particular class of trigger strategy equilibria. I then consider a series of comparative statics and extensions: (a) if for some exogenous reason one of the countries becomes more lenient towards mergers, than the other country becomes more lenient as well; (b) merger remedies increase the probability that a merger is approved and increase total welfare; (c) the effects of a merger wave are magnified by the equilibrium approval policy.     

On the desirability of an efficiency defense in merger control

We develop a model in which two firms that have proposed to merge are privately informed about merger-specific efficiencies. This enables the firms to influence the merger control procedure by strategically revealing their information to an antitrust authority. Although the information improves upon the quality of the authority's decision, the influence activities may be detrimental to welfare if information processing/gathering is excessively costly. Whether this is the case depends on the merger control institution and, in particular, whether it involves an efficiency defense. We derive the optimal institution and provide conditions under which an efficiency defense is desirable. We also discuss the implications for antitrust policy and outline a three-step procedure that takes the influence activities into consideration.     

Acquisition strategy and the market position of acquiring firms

Research suggests that firms which emphasize unrelated diversification through mergers and acquisitions are often located in unfavorable market positions, in terms of the attractiveness of their industries and their competitive positions within these industries. However, these previous research efforts have not established whether such positions will also be linked to firms using non-conglomerate acquisition strategies. This study utilizes three acquisition strategies—conglomerate, technology-related, and marketing-related—to hypothesize differences in the market position of acquisitive firms. Results show that, while acquisitive growth is generally associated with a decline in market position, one particular acquisition strategy, the marketing-related strategy, is associated with a distinctly superior position. Firms utilizing this strategy were found to be in more profitable industries and to have higher market shares in these industries.     

审计市场中的合并、产业专用化投资和价格竞争

本文从产业组织的角度，分析了审计市场的合并、产业专用化和价格竞争等竞争行为，并进一步探讨了这些行为对审计质量和社会福利的影响。本文认为，审计质量的信号传递机制推动了产业中的合并行为，而审计产业的专用化投资行为在于策略性地阻止进入。由于审计产品的异质性、信任品特性以及强大的买方谈判能力使得审计市场存在激烈的价格竞争，而合并和产业专用化投资有助于事务所降低成本。因而，审计市场的竞争提高了社会福利。     

A New Perspective on Entry in Horizontal Merger Analysis

I analyze horizontal mergers in procurement settings in which sellers incur costs to participate. Considering existing sellers’ contest-level entry differs from antitrust authorities’ typical emphasis on new sellers’ market-level entry to counteract a merger’s anticompetitive harm. I show that profitable mergers can increase consumer and total surplus by inducing more and stronger contest-level entry by the merged seller, which echoes common claims from merging parties that their merger is beneficial because it creates a stronger competitor. This finding suggests caution by antitrust authorities: when contest-level entry costs matter, standard models that ignore those costs prescribe blocking procompetitive mergers.

     

On the vertical integration of successive monopolies

This essay studies the private incentives for, and welfare consequences of, the vertical integration of successive monopolies. When the merged firm is as efficient as its pre-merger components, private and social interests coincide and the merger raises welfare by eliminating the double mark-up. When the merger leads to higher costs it is possible that some mergers will be privately profitable but not socially desirable and that some will be socially desirable but not privately profitable. These results suggest that a laissez-faire approach to this type of merger by antitrust authorities will not always be appropriate.     

Market structure and market outcomes in deregulated rail freight markets

Using cross-section data on a national sample of city-pair markets for rail freight, I examine correlations between prices, quantities, and the number of single-line and interline firms serving markets. I estimate the reduced form of a structural model in which rail rates and quantities depend on the number of firms. I find that rates increase as the number of firms serving the market falls, and quantities shipped rise as the number of firms falls. The result is consistent with market power for rail freight shippers that causes markups to rise when fewer firms serve the market, and is not consistent with other explanations of the relationship between number of firms and rates and quantities. Interline shipment is much more costly than single-line, suggesting that mergers may be desirable even if they exacerbate market power problems.     

Uncertain regulatory timing and market dynamics

Using a dynamic model of capacity accumulation, I examine the relationship between uncertainty about the timing of a new Pigouvian tax and oligopolistic competition. I find that for some market structures uncertainty about the timing of the regulatory change leads firms to increase investment. These results stem from the nature of the uncertainty and its interaction with firms' strategic incentive to engage in capacity races. They dramatize the importance of accounting for initial conditions when forecasting firms' reactions to anticipated regulatory changes. In addition, I find that more protracted uncertainty leads to greater welfare costs.     

Endogenous Mergers of Complements with Mixed Bundling

This paper studies endogenous mergers of complements with mixed bundling, by allowing both for joint and separate consumption. After merger, partner firms decrease the price of the bundled system. In addition, when markets for individual components are sufficiently important, partner firms find it strategically advantageous to raise the prices of stand-alone products, thus making substitute ‘mix-and-match’ composite products less attractive to consumers. Even though these effects favor the profitability of mergers, merging is not always an equilibrium outcome. The reason is that outsiders respond by cutting their prices to retain their market share, and mergers can be unprofitable when competition is intense. From a welfare analysis, we observe that the number of mergers that are observed in equilibrium may be either excessive (when markets for individual components are important) or suboptimal (when markets for individual components are less important).