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15-Horizontal Mergers - Horizontal Mergers 1 Introduction...

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Horizontal Mergers 1
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Merger mania of 1990s disappeared after 9/11/2001 But now appears to be returning Oracle/PeopleSoft AT&T/Cingular Bank of America/Fleet Reasons for merger cost savings search for synergies in operations more efficient pricing and/or improved service to customers 2 Introduction
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Are mergers beneficial or is there a need for regulation? cost reduction is potentially beneficial but mergers can “look like” legal cartels and so may be detrimental Government is particularly concerned with these questions AntiTrust Division Merger Guidelines seek to balance harm to competition with avoiding unnecessary interference While challenging harmful mergers, the Agency seeks to avoid unnecessary interference within the larger universe of mergers that are either competitively beneficial or neutral” DOJ – Guidelines – Section 2. Explore these issues 3 Questions
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Merger between firms that compete in the same product market some bank mergers hospitals oil companies Horizontal mergers replace two or more former competitors with a single firm. Begin with a surprising result The merger paradox merger that is not merger to monopoly is unlikely to be profitable 4 Horizontal mergers
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5 An Example Assume three identical firms; market demand P = 150 - Q; each firm with marginal costs of $30. The firms act as Cournot competitors . Applying the Cournot equations we know that: each firm produces output q(3) = (150 - 30)/(3 + 1) = 30 units the product price is P(3) = 150 - 3x30 = $60 profit of each firm is (3) = (60 - 30)x30 = $900 Now suppose that two of these firms merge, then there are two independent firms so output of each changes to: q(2) = (150 - 30)/3 = 40 units; price is P(2) = 150 - 2x40 = $70 profit of each firm is (2) = (70 - 30)x40 = $1,600 But prior to the merger the two firms had total profit of $1,800 This merger is unprofitable and should not occur Consumers worse off Non-merged firm –> better off Merged firms –> worse off
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6 A Generalization Take a Cournot market with N identical firms. Suppose that market demand is P = A - B.Q and that marginal costs of each firm are c . From standard Cournot analysis we know the profit of each firm is : C i = (A - c) 2 B(N + 1) 2 Now suppose that firms 1, 2,… M merge. This gives a market in which there are now N - M + 1 independent firms. The ordering of the firms does not matter
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7 Generalization Each non-merged firm chooses output q i to maximize profit: i (q i , Q -i ) = q i (A - B(q i + Q -i ) - c) where Q -i = is the aggregate output of the N - M firms excluding firm i plus the output of the merged firm q m The newly merged firm chooses output q m to maximize profit: m (q m , Q -m ) = q m (A - B(q m + Q -m ) - c) where Q -m = q m+1 + q m+2 + …. + q N is the aggregate output of the N - M firms that have not merged Comparing the profit equations then tells us: the merged firm becomes just like any other firm in the market all of the N - M + 1 post-merger firms are identical and so must produce the same output and make the same profits
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