Horizontal Mergers with Free-Entry: Why Cost Efficiencies May Be a Weak Defense and Asset Sales a Poor Remedy

13 Pages Posted: 31 Oct 2008

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: March 2001

Abstract

I analyze the effects of a merger between two firms in a spatially differentiatedoligopoly. I make the crucial assumption that the industry is at a free-entry equilibriumboth before and after the merger. In particular, I allow for the possibility of entry subsequent to the merger. Not surprisingly, this possibility improves the effect of the merger on consumer welfare. More importantly, I show that post-merger entry dramatically shifts the perspective on cost efficiencies as a merger defense and asset sales as a remedy. Cost efficiencies (in the form of lower marginal cost) decreasethe likelihood of entry, and thus benefit consumers less than if entry conditions wereexogenously given. Likewise, by selling assets (stores) to potential rivals, merging firms effectively \buy them o®," that is, dissuade them from opening new stores, an effect that is detrimental to consumers.

Keywords: Mergers, Entry, E±ciencies, Asset Sales

Suggested Citation

Cabral, Luis M. B., Horizontal Mergers with Free-Entry: Why Cost Efficiencies May Be a Weak Defense and Asset Sales a Poor Remedy (March 2001). NYU Working Paper No. EC-01-05. Available at SSRN: https://ssrn.com/abstract=1292670

Luis M. B. Cabral (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0858 (Phone)
212-998-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~lcabral

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
45
Abstract Views
626
PlumX Metrics