Large is Beautiful: Horizontal Mergers for Better Exploitation of Production Shocks

26 Pages Posted: 14 Apr 2008

See all articles by Wen Zhou

Wen Zhou

University of Hong Kong

Abstract

The profitability of horizontal mergers is investigated in a situation in which firms face a production shock and therefore are uncertain about their future costs. I show that, due to production rationalization, small-scale mergers can be profitable if the uncertainty is large. The efficiency gain in production also implies benign welfare consequences. Under cost uncertainty, a profitable merger always improves social welfare if no more than half of the industry's firms are allowed to merge. Finally, I show that the incentives to merge depend on the information structure. Firms are less likely to merge when they possess more information.

Suggested Citation

Zhou, Wen, Large is Beautiful: Horizontal Mergers for Better Exploitation of Production Shocks. The Journal of Industrial Economics, Vol. 56, Issue 1, pp. 68-93, March 2008, Available at SSRN: https://ssrn.com/abstract=1119636 or http://dx.doi.org/10.1111/j.1467-6451.2008.00333.x

Wen Zhou (Contact Author)

University of Hong Kong ( email )

1225 KKL Building
Pokfulam Road
Hong Kong
China

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