Mergers and Acquisitions in Mixed-Oligopoly Markets

Mergers and Acquisitions in Mixed-Oligopoly Markets -...

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International Journal of Business and Economics , 2006, Vol. 5, No. 2, 147-159 Mergers and Acquisitions in Mixed-Oligopoly Markets Germán Coloma * Department of Economics, CEMA University, Argentina Abstract This paper develops an oligopoly model with firms that may potentially be state- owned or privately owned and solves it for different cases in which the number and ownership of those firms vary. The results are then compared in terms of total surplus and consumer surplus, and this comparison produces implications for the antitrust appraisal of possible mergers and acquisitions. It follows that certain types of mergers are unambiguously favorable or unfavorable from the point of view of their contribution to both total and consumer surplus, while others may be beneficial in one of those dimensions but harmful in the other dimension. Key words : mergers and acquisitions; mixed oligopoly; public enterprise JEL classification : L33; D43; L44 1. Introduction The aim of this paper is to develop a model that is useful for analyzing the effect of mergers and acquisitions which occur in markets where firms can alternatively be state-owned or privately owned. The model considers the different incentives and behavioral rules that firms presumably follow, producing results that allow comparisons between the surpluses generated under different market structures and different ownership structures. The results have implications for the antitrust appraisal of mergers and acquisitions that may take place in those markets. We assume a market for a homogeneous product that can be supplied by either one firm or two firms that interact, choosing quantities and take the quantity provided by its eventual competitor as given (Cournot oligopoly). These firms can either be state-owned or privately owned. If they are private, their objective is to maximize their profits. If they are state-owned, their objective is to maximize their managers’ utility, which we assume to be an increasing function of the firm’s Received February 20, 2006, revised September 18, 2006, accepted October 18, 2006. * Correspondence to: CEMA University, Av. Córdoba 374, Buenos Aires, C1054AAP, Argentina. E-mail: gcoloma@cema.edu.ar. I am grateful for the comments of Manuel Abdala, Amado Boudou, Marcelo Celani, Pao-Long Chang, Sebastián Galiani, Fernando Navajas, Martín Rossi, Jorge Streb, Mariano Tommasi, Federico Weinschelbaum, one anonymous co-editor, one anonymous referee, and participants from seminars held at CEMA University, the National University of La Plata, and the University of San Andrés.
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International Journal of Business and Economics 148 expenditure in its production factors and inputs. In order to make the model more tractable, we assume that market demand is linear, and the minimum average and marginal cost of providing the good supplied by the firms is constant. This permits us to analyze the results as functions of a single relevant parameter—namely, the ratio between the minimum average cost and the consumers’ reservation price (i.e., the intercept of the demand price function).
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Mergers and Acquisitions in Mixed-Oligopoly Markets -...

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