Creating a merger option to strategically prevent a merger among suppliers or customers

Abstract

AbstractIt is well‐established in the literature that a horizontal merger in a supply chain is profitable (or beneficial to firms at another tier) if the merger synergy exceeds some threshold referred to as the profitable (or beneficial) threshold. Our paper goes one step further by finding that the profitable threshold is always lower than the beneficial threshold, which implies that a firm may have an incentive to prevent a horizontal merger between its suppliers or customers, but never wants to precipitate one. Moreover, we propose a strategy to achieve the preventive goal—a firm can develop an instrumental merger option with another rival firm, which can help prevent the target merger in one of two ways. First, if the synergy of the instrumental merger is high relative to the synergy of the target merger, the firm can carry out the instrumental merger—even an unprofitable one—preemptively to make the target merger unprofitable. Second, if the synergy of the target merger is not too high and the synergy of the instrumental merger is moderate, that is, the instrumental merger is profitable and will inflict severe harm on the firms in the target merger, the firm can reserve the instrumental merger option as a deterrent and the profitable target merger is deterred. An interesting implication of the deterrent role of the instrumental merger option is that when the firm has two candidate merger partners, it may choose the partner with a lower synergy for the deterrence purpose.