IntroMerger - Industrial Organization: EC460 Spring 2009...

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Unformatted text preview: Industrial Organization: EC460 Spring 2009 Instructor: Thomas D. Jeitschko Some Class Notes on Mergers We have studied the incentives to collude in oligopoly markets in the previous lectures. Noting that complete collusion is generally illegal, we were nonetheless able to determine under which circumstances firms may be able to tacitly agree to collusive schemes. In these lecture notes we consider the related topic of mergersfollowed later by some notes on acquisitions. While collusion (in particular cartel-formation) can be viewed as a complete industry merger, when we think of mergers we consider only a subset of firms in the industry that will coordinate their strategies. Such partial collusion is not as a general illegal, but is subject to legal review and may be illegal. Indeed, in many proposed mergers, non-merging firms frequently object to the proposed merger on the grounds that the resulting increased market concentration will adversely affect market outcomes. It is important to understand what criteria are used to evaluate the desirability of mergers. We begin with a simple Cournot model and consider how the market is affected by mergers. Cournot markets Pre-merger analysis: 3 firms Consider three firms competing in a market in Cournot fashion. Market demand is given by P = 140- Q and each firms costs are given by AC i = MC i = 20, with i { 1 , 2 , 3 } . 1 Firm 1s reaction function is implied by 140- 2 Q 1- Q 2- Q 3 = 20 ....
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This note was uploaded on 03/29/2009 for the course ECON 460 taught by Professor Boyer during the Spring '08 term at Michigan State University.

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IntroMerger - Industrial Organization: EC460 Spring 2009...

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