Entry by Merger: Estimates from a Two-Sided Matching Model with Externalities

Abstract

As firms often acquire incumbents to enter new markets, the presence of desirable targets affects entry and merger decisions simultaneously. We study these decisions jointly by estimating a two-sided matching model with externalities using data on commercial banks to investigate the effect of entry regulation. We exploit the lattice structure of stable allocations and partially identify payoffs including potential (dis)synergies. We find significantly low entry barriers for entry by merger and larger synergies between smaller potential entrants and larger incumbents. Finally, we conduct counterfactual experiments to study the implications of entry by merger on anti-trust policies that regulate forms of entry.

Keywords: Two-Sided Matching, Entry, Merger, Partial-Identification