Implications of Unprofitable Horizontal Mergers: A Positive External Effect Does Not Suffice to Clear a Merger!

Contemporary Economics, Vol. 10, No. 1, pp. 13-26, 2016

14 Pages Posted: 17 Apr 2016

See all articles by Oliver Budzinski

Oliver Budzinski

Ilmenau University of Technology

Jürgen-Peter Kretschmer

Philipps University Marburg - Department of Business Administration and Economics

Date Written: March 31, 2016

Abstract

Standard analysis of mergers in oligopolies along the lines of the popular Farrell-Shapiro Framework (FSF) relies, regarding its policy conclusions, on the assumption that rational agents will only propose privately profitable mergers. If this assumption were held, a positive external effect of a proposed merger would represent a sufficient condition to allow the merger. However, the empirical picture on mergers and acquisitions reveals a significant share of unprofitable mergers, and economic theory, moreover, demonstrates that privately unprofitable mergers can be the result of rational action. Therefore, we drop this restrictive assumption and allow for unprofitable mergers to occur. This exerts a considerable impact on merger policy conclusions: while several insights of the original analysis are corroborated (e.g., efficiency defense), a positive external effect does not represent a sufficient condition for the allowance of a merger any longer. Applying such a rule would cause a considerable amount of false decisions.

Keywords: mergers & acquisitions, oligopoly theory, horizontal merger policy, profitability of mergers, antitrust

JEL Classification: L13, L41, K21, D43

Suggested Citation

Budzinski, Oliver and Kretschmer, Jürgen-Peter, Implications of Unprofitable Horizontal Mergers: A Positive External Effect Does Not Suffice to Clear a Merger! (March 31, 2016). Contemporary Economics, Vol. 10, No. 1, pp. 13-26, 2016 , Available at SSRN: https://ssrn.com/abstract=2763530

Oliver Budzinski (Contact Author)

Ilmenau University of Technology ( email )

Ilmenau, D-98684
Germany

HOME PAGE: http://www.tu-ilmenau.de/wth

Jürgen-Peter Kretschmer

Philipps University Marburg - Department of Business Administration and Economics ( email )

Am Plan 2
Marburg, 35032
Germany

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