Mergers in Nonrenewable Resource Oligopolies and Environmental Policies
CentER Discussion Paper Series No. 2018-030
41 Pages Posted: 20 Sep 2018
Date Written: September 4, 2018
We study the profitability of horizontal mergers in nonrenewable resource industries, which account for a large proportion of merger activities worldwide. Each firm owns a private stock of the resource and uses open-loop strategies when choosing its extraction path. We analytically show that even a small merger (merger of 2 firms) is always profitable when the resource stock owned by each firm is small enough. In the case where pollution is generated by the industry's activity, we show that an environmental policy that increases the firm's production cost or reduces their selling price can deter a merger. This speeds up the industry's extraction and thereby causes emissions to occur earlier than under a laissez-faire scenario.
Keywords: exhaustible resources, horizontal mergers, environmental regulation, differntial games
JEL Classification: Q39, L41, Q58
Suggested Citation: Suggested Citation