Should Mergers Be Controlled?

46 Pages Posted: 26 Mar 2001

See all articles by Sven-Olof Fridolfsson

Sven-Olof Fridolfsson

Research Institute of Industrial Economics (IFN)

Johan Stennek

Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Date Written: February 2001

Abstract

Anti-competitive mergers benefit competitors more than the merging firms. We show that such externalities reduce firms' incentives to merge (a holdup mechanism). Firms delay merger proposals, thereby foregoing valuable profits and hoping other firms will merge instead - a war of attrition. The final result, however, is an overly concentrated market. We also demonstrate a surprising inter-temporal link. Merger incentives may be reduced by the prospect of additional profitable mergers in the future. The prospect of a future merger increases the value of becoming an insider in the first merger, which tends to hasten it. The prospect of a future merger may, however, increase the value of becoming an outsider in the first merger even more. If so, the first merger will be delayed by the prospect of the future merger. Merger control may help protect competition. Holdup and inter-temporal links make policy design more difficult, however. Even reasonable policies may be worse than not controlling mergers at all.

Keywords: Coalition formation, competition policy, endogenous mergers and acquisitions

JEL Classification: C78, L12, L41

Suggested Citation

Fridolfsson, Sven-Olof and Stennek, Johan, Should Mergers Be Controlled? (February 2001). CEPR Discussion Paper No. 2705, Available at SSRN: https://ssrn.com/abstract=264348

Sven-Olof Fridolfsson (Contact Author)

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Johan Stennek

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 5501
S-114 85 Stockholm
Sweden
+46 8 665 4536 (Phone)
+46 8 665 4599 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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