Mergers with Product Market Risk
Universitat Pompeu Fabra - Department of Economics and Business (DEB); City University London - Department of Economics
Northwestern University - Kellogg School of Management
CEPR Discussion Paper No. 4831
This Paper studies the private incentives and the social effects of horizontal mergers among risk averse firms. In our model, merging firms are allowed to choose how to split their joint profits, with implications for risk sharing and strategic behavior in the product market. If firms compete in quantities, consolidation makes firms more aggressive due to improved risk sharing. Mergers involving few firms are then profitable with a relatively small level of risk aversion. With strong enough risk aversion, mergers result in lower prices and higher social welfare. If firms instead compete in prices, consumers do not benefit from mergers with demand uncertainty, but can easily benefit in markets with cost uncertainty.
Number of Pages in PDF File: 33
Keywords: Oligopoly, market imperfection, mergers and acquisitions, monopolization and horizontal anticompetitive practices
JEL Classification: D43, G34, L41
Date posted: April 22, 2005
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