...Farell and Shapiro state that there is no necessity for mergers as cooperation and coordination can be achieved at an equivalent level via contracts: “..., modern economic theory observes that virtually anything that can be done with a merger can in principle be done instead with some kind of contract, perhaps a very complex (or restrictive) one.” (Farrell and Shapiro
2001, p. 691)...
6.2 Concluding Remarks
...In the last section I introduce the strand of economic literature that deals with the process of mergers under uncertain efficiency gains. By introducing uncertain synergies to Cournot merger models the merger paradox can be solved in all above presented approaches and compared to the deterministic models there is a wider scope of profitable mergers. The informational asymmetry after the merger benefits the merger members although efficiency gains may be not obtained post merger. Thus mergers are more likely to be beneficial compared to the case where uncertain efficiency gains are not assumed. It has been shown that the incentives to merger coincide with the degree of uncertainty and when firms are aware of this uncertainty they are able to prepare for the post-merger integration
process much better since post-merger actions can be specified more accurately. Any merger with uncertain synergies that needs to be approved by competition agencies can positively affect the approval by evaluating the uncertain efficiency gains with the required post-merger process...
...this may be an attempt to replicate the merger failures in the real world. To analyze further the role of uncertain synergies, models that depart from the one-shut nature should be implemented. This might give insights why merger formations appear wavelike and if the equilibrium changes when non-merged firms adjust as soon as
they observe the true type of their (new) rival. As the world has become realistically more transparent the unmerged firms may observe rather fast whether they face a more or less efficient rival and so the time horizon should ex ante alter the expected profits of the market players compared to the one-shot nature of the standard Cournot game.
The question what types of firms, the most or the least efficient ones are involved in a merger remains unanswered as there are ambiguous results in the theory of endogenous merger formation. The empirical observations also do not support the theory that low-performing firms are the preferred target for acquisitions.
Contents
1 Introduction
1.1 Literature Review
2 Industry Structure and it‘s Implications on Competition
2.1 The Static approach of Industry Structure
2.1.1 Monopoly
2.1.2 Cournot Competition
2.1.3 Bertrand Competition
3 Horizontal Mergers and the Effects on Quantities and Prices
3.1 The Effect of a Merger within Bertrand competition
3.1.1 Incentives for a Merger within Bertrand competition
3.1.2 Complementary Goods
3.1.3 Incentives to join a Merger
3.2 The Effect of a Merger within Cournot competition
3.2.1 Incentives for Mergers within Stackelberg games - Solving the Merger Paradox
3.2.2 Incentives for Mergers - Solving the Merger Paradox
3.3 The Effect of a Merger within Cournot competition on Welfare
4 Horizontal Mergers and Synergies
4.1 Efficiency Gains
4.1.1 Economies of Scale
4.1.2 Economies of Scope
4.1.3 A critical view towards Synergies
4.2 Endogenous Mergers and Efficiency Gains
5 Horizontal Mergers and uncertain Synergies
5.1 Modeling Mergers and uncertain Synergies
5.1.1 The Bayesian Equilibrium
5.1.2 Merger with Uncertainty and the Impact of private Information
5.1.3 The Effects of Uncertainty within Bertrand competition on Welfare
6 Conclusion
6.1 The Role of Uncertainty and the Consequences for Antitrust
6.2 Concluding Remarks
Objectives and Research Themes
The core objective of this thesis is to examine the literature concerning horizontal merger formation and to explore how theoretical models of merger activity can be improved to better replicate real-world scenarios. It addresses key questions regarding the benefits of mergers, the motivations for firms to merge, and how the introduction of uncertainty impacts the traditional outcomes of merger analysis.
- Analysis of firm motivations for horizontal mergers under Cournot and Bertrand competition.
- Examination of the "merger paradox" and various theoretical approaches to overcome it.
- Evaluation of the role of efficiency gains and synergies in justifying merger activities.
- Investigation of how uncertainty regarding synergies and costs influences merger profitability and welfare outcomes.
Excerpt from the Book
1 Introduction
There are many opportunities for firms to cooperate and to coordinate their actions. Farell and Shapiro state that there is no necessity for mergers as cooperation and coordination can be achieved at an equivalent level via contracts: “..., modern economic theory observes that virtually anything that can be done with a merger can in principle be done instead with some kind of contract, perhaps a very complex (or restrictive) one.” (Farrell and Shapiro 2001, p. 691).
Nonetheless, recently many firms have announced intense interest in merger and acquisition activities1. There are clear advantages of mergers compared to e.g. strategic alliances although both provide the possibility to coordinate strategies. In contrast to alliances, a merger enables coordination of many diverse decisions that are not refined pre-merger. A merger may also leads to more market power and hence to better access to the financial market by obtaining an advantageous risk structure. Although a merger might need the approval of the competition authorities, it is the preferred coordination concept to maintain synergies. The prospect of sharing economic risks by obtaining a larger market share or being more diversified surely further motivates firms to coordinate their actions via mergers.
Summary of Chapters
1 Introduction: Provides an overview of firm cooperation strategies and the increasing relevance of mergers in the globalized economy.
2 Industry Structure and it‘s Implications on Competition: Summarizes the differences between Cournot and Bertrand competition models and establishes the baseline for analyzing mergers.
3 Horizontal Mergers and the Effects on Quantities and Prices: Discusses the impact of mergers within both Bertrand and Cournot frameworks, focusing on incentives and the merger paradox.
4 Horizontal Mergers and Synergies: Explores efficiency gains, such as economies of scale and scope, as primary motivations for merger formation.
5 Horizontal Mergers and uncertain Synergies: Investigates the impact of uncertainty and private information on merger decisions and their consequences for welfare.
6 Conclusion: Synthesizes the findings on synergy-driven mergers and provides final reflections on antitrust policy and future research directions.
Keywords
Horizontal Mergers, Industrial Organization, Cournot Competition, Bertrand Competition, Merger Paradox, Efficiency Gains, Synergies, Market Concentration, Uncertainty, Bayesian Equilibrium, Welfare Effects, Antitrust, Cost Rationalization, Firm Strategy, Strategic Alliances.
Frequently Asked Questions
What is the primary scope of this thesis?
The thesis explores the economic theory behind horizontal mergers, focusing on how firms decide to merge and the resulting effects on market variables like prices, quantities, and industry structure.
Which theoretical models of competition are central to the work?
The analysis primarily utilizes Cournot (quantity-based) and Bertrand (price-based) competition models to evaluate firm behavior and merger incentives.
What is the "merger paradox"?
The merger paradox refers to the theoretical observation in standard Cournot models that horizontal mergers often do not increase the profitability of the merging firms unless a significant market share is combined.
How are efficiency gains and synergies treated in the analysis?
Efficiency gains, such as economies of scale and scope, are examined as crucial factors that can make a merger privately and socially desirable, helping to resolve the merger paradox.
What is the significance of uncertainty in the thesis?
The thesis incorporates uncertainty to demonstrate that in real-world scenarios, private information about post-merger synergies can create different incentives for firms to merge than those predicted by deterministic models.
How does the author evaluate the impact on welfare?
Welfare analysis is conducted by considering both consumer and producer surplus, examining how mergers—when involving efficiency gains or uncertainty—can affect aggregate industry outcomes.
What specific role does the Bayesian Equilibrium play in the model?
The Bayesian Equilibrium is used in Section 5 to model scenarios where firms lack complete information about their rivals' cost structures, allowing for a more realistic assessment of merger outcomes under uncertainty.
What does the thesis conclude regarding antitrust policy?
The author argues that competition authorities should carefully evaluate uncertain synergies, as they may enhance social welfare in volatile markets, and that uncertainty alone should not be a sufficient reason for rejecting mergers.
- Citation du texte
- Kathrin Tiecke (Auteur), 2011, Mergers and (uncertain) Synergies in Oligopoly, Munich, GRIN Verlag, https://www.grin.com/document/172820
