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

20 Pages Posted: 20 Nov 2007  

Oliver Budzinski

Ilmenau University of Technology

Jürgen-Peter Kretschmer

Philipps University Marburg - Department of Business Administration and Economics

Date Written: 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.

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

JEL Classification: L13, L41, K21, D43

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: https://ssrn.com/abstract=1031347 or http://dx.doi.org/10.2139/ssrn.1031347

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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