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

Info icon This preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Horizontal Mergers 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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
Image of page 2
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
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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
Image of page 4
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
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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
Image of page 6
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
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern