The role of divestitures in horizontal mergers

Abstract

We study the effectiveness of divestitures as a merger remedy. We show that divestitures are more effective in mitigating the market power impact of mergers if the merging firms divest assets to buyers outside the industry rather than existing rivals. Divestitures are also more effective as merger remedies when the merging industry is concentrated and when powerful customers are absent. Notably, stock price reactions of the acquirer and rivals suggest that firms are more concerned with maintaining a competitive edge relative to each other than gaining market power relative to customers.