Abstract

http://ssrn.com/abstract=1031347
 
 

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Implications of Unprofitable Horizontal Mergers: A Re-Interpretation of the Farrell-Shapiro-Framework


Oliver Budzinski


Ilmenau University of Technology

Jürgen-Peter Kretschmer


Philipps University Marburg - Department of Business Administration and Economics

November 15, 2007


Abstract:     
We demonstrate that the popular Farrell-Shapiro-Framework (FSF) for the analysis of mergers in oligopolies 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 extend the FSF by explicitly allowing for unprofitable mergers to occur with some frequency. This exerts a considerable impact on merger policy conclusions: while several insights of the original FSF 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 positives. In addition, we conclude that the FSF need to be explicitly complemented by a freedom of competition principle in order to make it workable as a basis for an economics-based merger policy.

Number of Pages in PDF File: 20

Keywords: oligopoly theory, horizontal merger policy, profitability of mergers, freedom of competition, antitrust

JEL Classification: L13, L41, K21, D43

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Date posted: November 20, 2007  

Suggested Citation

Budzinski, Oliver and Kretschmer, Jürgen-Peter, Implications of Unprofitable Horizontal Mergers: A Re-Interpretation of the Farrell-Shapiro-Framework (November 15, 2007). Available at SSRN: http://ssrn.com/abstract=1031347 or http://dx.doi.org/10.2139/ssrn.1031347

Contact Information

Oliver Budzinski (Contact Author)
Ilmenau University of Technology ( email )
Ilmenau, D-98684
Germany
HOME PAGE: http://www.tu-ilmenau.de/wth
Jürgen-Peter Kretschmer
Philipps University Marburg - Department of Business Administration and Economics ( email )
Am Plan 2
Marburg, 35032
Germany
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