Merger Performance Under Uncertain Efficiency Gains

41 Pages Posted: 11 Jun 2004

See all articles by Licun Xue

Licun Xue

McGill University - Department of Economics

Effrosyni Diamantoudi

Concordia University, Quebec - Department of Economics

Rabah Amir

University of Arizona - Department of Economics; University of Arizona

Date Written: May 2004

Abstract

In view of the uncertainty over the ability of merging firms to achieve efficiency gains, we model the post-merger situation as a Cournot oligopoly wherein the outsiders face uncertainty about the merged entity's final cost. At the Bayesian equilibrium, a bilateral merger is profitable provided that non-merged firms sufficiently believe that the merger will generate large enough efficiency gains, even if ex post none actually materialize. The effects of the merger on market performance are shown to follow similar threshold rules. The findings are broadly consistent with stylized facts, and provide a rationalization for an efficiency consideration in merger policy.

Keywords: Horizontal merger, Bayesian Cournot equilibrium, Efficiency gains, Market performance

JEL Classification: D43, L11, L22

Suggested Citation

Xue, Licun and Diamantoudi, Effrosyni (Faye) and Amir, Rabah, Merger Performance Under Uncertain Efficiency Gains (May 2004). FEEM Working Paper No. 79.04. Available at SSRN: https://ssrn.com/abstract=546631 or http://dx.doi.org/10.2139/ssrn.546631

Licun Xue (Contact Author)

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
Canada

Effrosyni (Faye) Diamantoudi

Concordia University, Quebec - Department of Economics ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

Rabah Amir

University of Arizona - Department of Economics ( email )

Tucson, AZ 85721
United States

University of Arizona ( email )

Department of History
Tucson, AZ 85721
United States

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