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
Journal of Economics & Management Strategy, Vol. 15, No. 3, pp. 577-608, Fall 2006
This paper studies the causes and the consequences of horizontal mergers among risk-averse firms. The amount of diversification depends on the allocation of shares among the merging firms, with a direct risk-sharing effect and an indirect strategic effect. If firms compete in quantities, consolidation makes firms more aggressive. Mergers involving few firms are then profitable with a relatively low level of risk aversion. With strong enough risk aversion, mergers reduce prices and improve social welfare. If firms instead compete in prices, consumers do not benefit from mergers in markets with demand uncertainty, but can easily benefit with cost uncertainty.
Number of Pages in PDF File: 32Accepted Paper Series
Date posted: July 20, 2006
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