Mergers with Product Market Risk

32 Pages Posted: 20 Jul 2006

See all articles by Albert Banal-Estañol

Albert Banal-Estañol

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

Marco Ottaviani

Bocconi University - Department of Economics

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Abstract

This paper studies the causes and the consequences of horizontal mergers among risk-averse firms. The amount of diversification depends on the allocation of shares among the merging firms, with a direct risk-sharing effect and an indirect strategic effect. If firms compete in quantities, consolidation makes firms more aggressive. Mergers involving few firms are then profitable with a relatively low level of risk aversion. With strong enough risk aversion, mergers reduce prices and improve social welfare. If firms instead compete in prices, consumers do not benefit from mergers in markets with demand uncertainty, but can easily benefit with cost uncertainty.

Suggested Citation

Banal Estañol, Albert and Ottaviani, Marco, Mergers with Product Market Risk. Journal of Economics & Management Strategy, Vol. 15, No. 3, pp. 577-608, Fall 2006, Available at SSRN: https://ssrn.com/abstract=918390 or http://dx.doi.org/10.1111/j.1530-9134.2006.00111.x

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

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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