Mergers with Product Market Risk

33 Pages Posted: 22 Apr 2005  

Albert Banal-Estañol

Universitat Pompeu Fabra - Department of Economics and Business (DEB); City University London - Department of Economics

Marco Ottaviani

Northwestern University - Kellogg School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

Abstract

This Paper studies the private incentives and the social effects of horizontal mergers among risk averse firms. In our model, merging firms are allowed to choose how to split their joint profits, with implications for risk sharing and strategic behavior in the product market. If firms compete in quantities, consolidation makes firms more aggressive due to improved risk sharing. Mergers involving few firms are then profitable with a relatively small level of risk aversion. With strong enough risk aversion, mergers result in lower prices and higher social welfare. If firms instead compete in prices, consumers do not benefit from mergers with demand uncertainty, but can easily benefit in markets with cost uncertainty.

Keywords: Oligopoly, market imperfection, mergers and acquisitions, monopolization and horizontal anticompetitive practices

JEL Classification: D43, G34, L41

Suggested Citation

Banal-Estañol, Albert and Ottaviani, Marco, Mergers with Product Market Risk (January 2005). CEPR Discussion Paper No. 4831. Available at SSRN: https://ssrn.com/abstract=709141

Albert Banal Estañol (Contact Author)

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

City University London - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Marco Ottaviani

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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