V_Contractual Relations between Firms

V_Contractual Relations between Firms -...

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Contractual Relations between Firms V. Contractual Relations between Firms eading: Chapter 16 7 Reading: Chapter 16 17 1
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V.I. Horizontal Mergers Introduction 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 arch for synergies in operations search for synergies in operations more efficient pricing and/or improved service to customers Chapter 16: Horizontal Mergers 2
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V.I. Horizontal Mergers Questions Are mergers beneficial or is there a need for regulation? st reduction is potentially beneficial cost reduction is potentially beneficial but mergers can “look like” legal cartels and so may be detrimental S t i ti l l d ith th ti US government is particularly concerned with these questions AntiTrust Division Merger Guidelines seek to balance harm to competition with avoiding nnecessary interference unnecessary interference Explore these issues in next two chapters distinguish mergers that are orizontal: Bank of America/Fleet horizontal: Bank of America/Fleet vertical: Disney/ABC conglomerate: Gillette/Duracell; Quaker Oats/Snapple Chapter 16: Horizontal Mergers 3
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V.I. Horizontal Mergers Merger between firms that compete in the same product market some bank mergers hospitals oil companies Begin with a surprising result: the merger paradox ke the standard ournot odel take the standard Cournot model merger that is not merger to monopoly is unlikely to be profitable nless “sufficiently many” of the firms merge unless sufficiently many of the firms merge with linear demand and costs, at least 80% of the firms but this type of merger is unlikely to be allowed Chapter 16: Horizontal Mergers 4
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V.I. Horizontal Mergers An Example Assume 3 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 π (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 π (2) = (70 30)x40 = $1,600 ut rior to the merger the two firms had total profit of $ 800 But prior to the merger the two firms had total profit of $1,800 This merger is unprofitable and should not occur Chapter 16: Horizontal Mergers 5
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V.I. Horizontal Mergers A Generalization Take a Cournot market with N identical firms. ppose that arket emand is P = A Q nd that marginal Suppose that market demand is P = A B.Q and that marginal costs of each firm are c.
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This note was uploaded on 07/26/2010 for the course ECON ECON-003 - taught by Professor Das during the Winter '09 term at UC Riverside.

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V_Contractual Relations between Firms -...

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