Debt and Mergers
35 Pages Posted: 29 Nov 2023 Last revised: 30 May 2024
Date Written: November 8, 2023
Abstract
We consider the effects of debt on the price effects of horizontal mergers. Mergers
let firm spread repayment of debt over a diversified product portfolio, which in our
model can create downward pressure on price effects caused by the loss of rivalry
between the firms. We also show that mergers can provide an insurance effect when firms merge across markets. In simulations, we demonstrate that prices effects are
uniformly lower in the model with debt than the standard model. We also find
that mergers by firms that do not overlap can lead to price decreases but that the benefits of operating in diverse markets decrease as we simulate mergers between firms that overlap in a greater number of markets.
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