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Does the Potential to Merge Reduce Competition?

55 Pages Posted: 8 Mar 2012 Last revised: 19 Nov 2017

Dirk Hackbarth

Boston University Questrom School of Business; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Bart Taub

University of Illinois

Date Written: November 9, 2017

Abstract

We study anti-competitive mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge, which trades off benefits of avoiding price wars against the costs of merging. There are three results. First, mergers are optimal when collusion fails (i.e., firms sufficiently deviate from a collusive regime). Second, long periods of collusion are likely, because colluding is dynamically stable. Therefore, mergers are rare. Third, mergers (and, in particular, lower merger costs) decrease pre-merger collusion, as punishments by price wars are weakened. Thus, although anti-competitive mergers harm competition ex-post, barriers and costs of merging due to regulation should be reduced to promote competition ex-ante.

Keywords: Competition, imperfect information, industry structure, market power, mergers

JEL Classification: D43, L12, L13, G34

Suggested Citation

Hackbarth, Dirk and Taub, Bart, Does the Potential to Merge Reduce Competition? (November 9, 2017). Available at SSRN: https://ssrn.com/abstract=2018612 or http://dx.doi.org/10.2139/ssrn.2018612

Dirk Hackbarth

Boston University Questrom School of Business ( email )

Department of Finance
595 Commonwealth Avenue
Boston, MA 02215
United States
(617) 358-4206 (Phone)
(617) 353-6667 (Fax)

HOME PAGE: http://people.bu.edu/dhackbar/

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Bart Taub (Contact Author)

University of Illinois ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States
217-333-3467 (Phone)
217-244-6678 (Fax)

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