Sequential Mergers and Competition Policy under Partial Privatization

Abstract

This study assesses the conditions under which sequential mergers can emerge in a partially privatized oligopoly with differentiated goods. In particular, it examines: (i) the optimal merger strategies by potential merging firms, (ii) optimal merger policy, and (iii) privatization policy of policymakers. First, under the subgame perfect Nash equilibrium, sequential mergers either completely emerge or do not emerge at all. The parameter range that leads to complete sequential mergers becomes larger as the market is more privatized. Second, policymakers can halt privatization, diminishing the private incentive for further sequential mergers and thus leading to higher welfare. Furthermore, given that some mergers have already taken place, further mergers may actually improve welfare. These welfare-improving mergers may not be privately profitable, however, implying that there may be room for merger-friendly policies. Third, policymakers are better off partially privatizing the public firm unless the goods are perfect substitutes or independent. Our results are applicable to the Japanese life insurance industry and the partial privatization of Japan Posting Insurance.