Endogenous Mergers Research Articles

Estimation of Cost Synergies from Mergers: Application to U.S. Radio

This paper develops a way to estimate fixed-cost efficiencies from mergers. The estimates might be used to assess the total welfare impact of retrospective and counterfactual mergers. The procedure uses a structural model in which companies play a dynamic game with endogenous mergers and product-repositioning decisions. This formulation corrects for a sample selection of more profitable mergers and captures follow-up mergers as well as post-merger product repositionings. The basic idea behind the estimator is to treat mergers as endogenous, thereby allowing for a comparison between mergers observed in the data and counterfactual ones, based on simulated long-run gains for different levels of cost efficiencies. The framework is applied to estimate cost efficiencies after the 1996 de-regulation of U.S. radio. I find that average cost savings (across all owners), over the period 1996-2006, only from mergers after 1996, amount to about $1.2 billion per year (roughly $0.6b from economies of scale and another $0.6b from within-format cost synergies).

Endogenous mergers: bidder momentum and market reaction

Recent empirical studies on stock misvaluation as a possible determinant of mergers are inconclusive concerning the central hypothesis that over (under) valuation is negatively (positively) associated with merger announcement returns in stock mergers, but not in cash mergers. We provide empirical support for this hypothesis. In contrast to prior research, we employ a two-stage model to account for endogenous mergers and suggest an alternative specification of misvaluation based on an asset-pricing model (bidder momentum). In the first stage, we specify panel logit models to predict US mergers from 1981 to 2003 and find that bidder momentum triggers stock mergers, but not cash mergers. In the second stage, we regress cumulated abnormal returns on merger probabilities to control for the endogeneity of mergers. This reveals a lower market response for stock mergers compared to cash mergers, which we identify as market correction of misvalued acquirers.

Endogenous mergers under multi-market competition

This paper examines a simple model of strategic interactions among firms that face at least some of the same rivals in two related markets (for goods 1 and 2). It shows that when firms compete in quantity, market prices increase as the degree of multi-market contact increases. However, the welfare consequences of multi-market contact are more complex and depend on how two fundamental forces play out. The first is the selection effect, which acts to increase welfare, as shutting down the relatively more inefficient firm is beneficial. The second opposing effect is the internalisation of the Cournot externality effect; reducing the production of good 2 allows firms to sustain a higher price for good 1. This works to increase prices and, therefore, decrease consumer surplus (but increase producer surplus). These two effects are influenced by the degree of asymmetry between markets 1 and 2 and the degree of substitutability between goods 1 and 2.

Stable market structures from merger activities in mixed oligopoly with asymmetric costs

This paper examines endogenous merger formations in a mixed oligopoly. Applying the core as a solution concept, we analyze which market structure(s) remain(s) stable when three firms—two symmetric private firms and one inefficient public firm—are allowed to merge with each other in a mixed Cournot industry. We show that according to the value of the marginal cost of the public firm, there always exists a pair of share ratios of the owners of both the (pre-merged) public firm and the (pre-merged) private firm such that the market structure with the merger between the public firm and one private firm belongs to the core. When the initial market structure is a mixed triopoly, it can only be blocked when one public firm and one private firm merge. Furthermore, we conduct a similar analysis in a general mixed oligopoly with one public firm and n private firms.

A Multi-Product Framework Generating Waves of Mergers and Divestitures

Recent waves of corporate mergers followed by divestitures have sparked new interest in economic analyses of these issues. We take the merger paradox from the standard oligopoly literature as a starting point and show that in the absence of any cost-synergies of merger activities, firms do have an incentive to divest further instead of joining mergers. We then analyze conditions where mergers may emerge endogenously as a result of a market game. Due to the nature of the interaction of market-share and market-concentration effects in Cournot oligopolies, a stable internal equilibrium where mergers arise endogenously and simultaneously requires both cost synergies and cost dissynergies. Endogenous merger size is then a function of market parameters as well as cost synergy parameters. Hence anticipated changes in market size or cost synergies attainable through mergers lead to reconfigurations of merger sizes. If ex-ante expectations about merger-promoting changes are not fully realized ex-post, merger waves will be followed by divestiture waves. Firm valuation - based on ex-ante expectation - may increase while actual profits and efficiency of the merged entity - according to the ex-post realization - may fall.

Industry Concentration and Welfare: On the Use of Stock Market Evidence from Horizontal Mergers

There is diverging empirical evidence on the competitive effects of horizontal mergers: consumer prices (and thus presumably competitors' profits) often rise while competitors' share prices fall. Our model of endogenous mergers provides a possible reconciliation. It is demonstrated that anti‐competitive mergers may reduce competitors' share prices, if the merger announcement informs the market that the competitors lost a race to buy the target. Also the use of ‘first rumour’ as an event may create similar problems of interpretation. We also indicate how the event‐study methodology may be adapted to identify competitive effects and thus the welfare consequences for consumers.

The Effects of Trade Liberalization between Heterogeneous Countries on Endogenous Mergers

AbstractThis paper examines the effects of trade liberalization on merger behavior. We endogenize merger choice among owners in an oligopolistic industry in asymmetric countries to analyze the consequences of trade cost reductions on competitiveness and welfare. In this context, the non‐cooperative game supports asymmetric market structures. We also find that trade liberalization is not necessarily pro‐competitive in countries with the competitive advantage, even if trade costs are completely abolished. Moreover, the tariff‐jumping explanation of international mergers does not necessarily apply. The welfare analysis shows that merger behavior can significantly alter any gains from liberalization. Countries should consider enforcing competition in regional agreements. Specifically, to avoid a reduction in domestic welfare following trade‐liberalizing reductions in trade costs, a high‐cost country's optimal policy may be to ban international mergers.

Endogenous mergers and cost heterogeneity

The objective of this article is to analyze the effect of firms’ heterogeneity on their incentives to merge. To reach this target, merger decisions are modelled as endogenous. To simplify the analysis, we focus on the extreme case where merger leads to monopolization. Kamien and Zang (1990, 1993) give monopolization conditions in static and dynamic acquisition games. Introducing cost heterogeneity in a n-firm industry, we provide more general monopolization conditions. Indeed, we show that any industry can be monopolized if cost heterogeneity is large enough. This result provides new information to competition authorities on concentration possibilities and allows them to focus particularly on some industries.

A Dynamic Model of Endogenous Mergers and Trade Liberalization

This paper uses a dynamic dominant-firm model with an endogenous merger process to examine the effects of trade liberalization on industry structure. Domestic and cross-border mergers and demergers are allowed for. When firms are myopic and the dominant firm has a sufficiently high pre-merger capital share in any one country, trade liberalization causes the industry to become significantly more concentrated. When firms are forward-looking, this anti-competitive effect of trade liberalization is mitigated. Tariff reduction from a prohibitive to a non-prohibitive level aligns merger patterns across countries and initiates merger (or demerger) waves simultaneously across countries, provided all firms are equally forward-looking. When the dominant firm is more forward-looking than the fringe, however, this result may be reversed. These results, thus, highlight the importance of taking into consideration existing industry structure and firms' discount rates whilst formulating competition policy in the face of trade liberalization.

Intensity of Competition and Market Structure in the Italian Banking Industry

This work tests the predictions of Sutton's model of independent submarkets for the Italian retail banking industry. In the first part of this paper, I develop a model of endogenous mergers to evidence the relationship between firms' conduct, market entry and market structure. In the second part, I identify the submarket dimension and estimate the relationship between market size and market structure using data on bank branches. The size of the submarkets turned out to be at most provincial whereas the limiting concentration index - as argued by Sutton for industries with exogenous sunk costs - goes to zero as the market becomes larger.

Monopolization through endogenous vertical mergers

While endogenous merger analysis has been applied to horizontal mergers, the thrust of vertical merger analysis has been based on exogenous mergers. The goal of this paper is to analyze endogenous vertical mergers. I consider a market structure with a downstream monopolist and an oligopolistic upstream industry. The downstream monopolist chooses to buy a certain number of the upstream firms. Mergers are endogenous, in the sense that the bids made by the downstream firm must be accepted by each of the integrated upstream firms, and must not exceed the increase in the profits of the downstream firm. It is shown that the unique equilibrium is complete monopolization: the buyer buys all the firms in the upstream industry. This result is consistent with the result that vertical mergers are profitable. However, it is in contrast with horizontal endogenous mergers, where complete monopolization is generally not an equilibrium.

Merger waves: a model of endogenous mergers

We develop a model of endogenous mergers to study their dynamic process. Firms choose whether, when, and with whom to merge. Two necessary conditions are identified for mergers to occur: firm heterogeneity and negative demand shocks. We show that mergers are strategic complements and therefore tend to occur in waves. Moreover, some mergers occur for strategic reasons in order to precipitate further mergers.

Endogenous mergers and endogenous efficiency gains: The efficiency defence revisited

We analyse the effects of investment decisions and firms' internal organisation on the efficiency and stability of horizontal mergers. In our framework efficiency gains are endogenous and there might be internal conflict within merged firms. We show that, both with and without conflict, stable mergers often do not generate efficiency gains. In the case of internal conflict, mergers may even lead to efficiency losses. Our welfare results suggest that antitrust authorities may approve welfare-reducing mergers (type II error) and block welfare-enhancing mergers (type I error) if they assume that potential efficiency gains will always be realised. In addition, the paper offers a possible explanation for merger failures.

MERGER, EASE OF ENTRY AND ENTRY DETERRENCE IN A DYNAMIC MODEL

We analyze whether ease and speed of entry can mitigate the anti‐competititve effects of a merger, in a dynamic model of endogenous merger. In our model, if new firms can enter quickly, it is more likely that merger is motivated by efficiency as opposed to increased market power. Thus, there is less reason to challenge the merger. On the other hand, if entry of new firms becomes less costly, firms may have a stronger incentive to monopolize the industry through horizontal merger. We also show that when the incumbent can engage in entry deterrence activities, anti‐merger policy can decrease welfare.

Merger, Ease of Entry, and Entry Deterrence in a Dynamic Model

We analyze whether ease and speed of entry can mitigate the anti-competititve effects of a merger, in a dynamic model of endogenous merger. In our model, if new firms can enter quickly, it is more likely that merger is motivated by efficiency as opposed to increased market power. Thus, there is less reason to challenge the merger. On the other hand, if entry of new firms becomes less costly, firms may have a stronger incentive to monopolize the industry through horizontal merger. We also show that when the incumbent can engage in entry deterrence activities, anti-merger policy can decrease welfare.

National versus international mergers in unionized oligopoly

We analyze how the presence of trade unions affects the pattern of mergers in an international oligopoly and the welfare implications thereof. We find that wages for the merger participants are always lower when they merge internationally, rather than nationally. Using a model of endogenous merger formation, we find that the firms will merge internationally in equilibrium. There are more international mergers than socially preferred, unless products are close substitutes. A “national champion” policy of promoting domestic mergers rather than international ones is nevertheless never optimal.

Managerial Delegation and Merger Incentives with Asymmetric Costs

We analyse how the internal organisation of firms affects the correspondence between private and social incentives for horizontal merger. Applying a model of endogenous merger formation in a three-firm asymmetric Cournot industry, we contrast the cases of entrepreneurial and managerial firms. The use of strategic delegation increases both the probability that a merger takes place and the likelihood that the wrong type of merger, from the viewpoint of social welfare, is undertaken. This suggests that managerial delegation increases the scope for antitrust policy.

Endogenous mergers in endogenous sunk cost industries

This paper uses an endogenous coalition formation game to derive an upper bound to industry concentration. The proposed coalitional stability concept assumes that firms are endowed with foresight in that they look ahead and anticipate the ultimate outcome of their actions. It is shown that while in exogenous sunk cost industries the upper bound to concentration falls as the market becomes large, in endogenous sunk cost industries, regardless of the size of the market, arbitrarily concentrated outcomes can arise in equilibrium. In addition, for this second class of industries, if products are sufficiently good substitutes, then duopoly coalition structures can only be sustained in equilibrium if composed of sufficiently size asymmetric coalitions. The results, therefore, complement those of Sutton [Sutton, J. 1991, Sunk Costs and Market Structure, Cambridge, MA: MIT Press; Sutton, J. 1998, Technology and Market Structure: Theory and History, Cambridge, MA: MIT Press.].

Hold-up of anti-competitive mergers

We construct a model of endogenous mergers and study some issues of whether and how to control mergers, taking into account firms equilibrium response to policy. Anti-competitive mergers benefit competitors more than the merging firms. We show how such free-riding reduces firms incentives to merge (holdup). Firms delay merger proposals, hoping other firms will merge instead. The final result, however, is an overly concentrated market. Merger control may thus preserve competitive markets. In the presence of holdup, even reasonable policies such as requiring divestiture or using cost-benefit analysis, may be worse than not controlling mergers at all.

Merger Policy to Promote 'Global Players'? A Simple Model

We use a simple framework where firms in two countries serve their respective domestic markets and a world market to analyze under which conditions cost-reducing mergers will be beneficial for the merging firms, the home country, and the world as a whole. For a national merger, the policies enacted by a national merger authority tend to be overly restrictive from a global efficiency perspective. In contrast, all international mergers that benefit the merging firms will be cleared by either a national or a regional regulator, and this laissez-faire approach is also globally efficient. Finally, we derive the properties of the endogenous merger equilibrium.