Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Economics | Economics | 2013
Thesis number: 13403
Horizontal mergers - profitability, welfare effects and merger control
|Title:||Horizontal mergers - profitability, welfare effects and merger control|
|Year:||2013 Language: eng|
|Department:||Department of Economics|
|Index terms:||kansantaloustiede; economics; yrityskaupat; corporate acquisitions; peliteoria; game theory; mallit; models; kilpailu; competition|
|Key terms:||horizontal mergers; game-theory; oligopoly models; efficiency gains; unilateral effects; coordinated effects; synergies; welfare effects; competition policy|
This thesis discusses the welfare effects of horizontal mergers and firms' incentives to merge. More specifically, it analyzes a merger's impact on price level, conditions for a merger to increase welfare, the effect of synergies on a merger's profitability and merger policy aspects in the US and EU Merger Regulation.
The study is conducted as a literature review and is based on the Industrial Organization theory. It begins with a discussion of efficiency gains and anticompetitive-effects of horizontal mergers and examines how these are assessed under different welfare standards. Efficiencies resulting from a merger are categorized to allocative, productive, dynamic, and transactional efficiencies. Welfare-reducing effects may arise if a merger leads to higher prices or a reduction in output as a result of unilateral or coordinated behavior. To examine the welfare consequences of mergers that both increase prices and create efficiencies, the Williamson trade-off model that balance the gains against anti-competitive effects is presented. Then I focus on few most important studies that evaluate the effects of horizontal mergers based mostly on game-theoretic non-collusive models of oligopoly. With a linear Cournot competition model, I show that a merger is uprofitable unless at least 80 percent of the firms in the industry are involved in the merger. This result, often referred as the merger paradox, is then resolved by showing that with sufficiently convex costs two Cournot competitors can profitably merge. Under the Bertrand price competition model with differentiated goods, mergers are shown to be always beneficial for the merging parties and even more profitable for the outsiders. The role of synergies and welfare effects of horizontal mergers are studied with a Cournot competition model that focuses on the efficiencies and external effects of mergers. This model shows that in the absence of synergies, a horizontal merger necessarily lead to an increase in price. However, only profitable mergers are proposed and if the merger has a positive external effect on consumers and the rival firms, it will also increase the welfare.
In addition, the evolution of the US and EU merger control and their differences are discussed. Their approach towards unilateral effects and efficiency defense is examined and the competition tests applied by the competition authorities are introduced. Finally, new approaches to evaluate the effects of mergers are presented. These are merger simulation and Upward Pricing Pressure method that focuses on analyzing unilateral competitive effects of differentiated product mergers and was successfully introduced in the 2010 US Horizontal Merger Guidelines.
Master's theses are stored at Learning Centre in Otaniemi.