V_Contractual Relations between Firms

V_Contractual Relations between Firms - V....

Info icon This preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
V Contractual Relations between Firms V. Contractual Relations between Firms Reading: Chapter 16 17 Reading: Chapter 16 17 1
Image of page 1

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

View Full Document Right Arrow Icon
V.I. Horizontal Mergers I d i 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 search for synergies in operations more efficient pricing and/or improved service to customers Chapter 16: Horizontal Mergers 2
Image of page 2
V.I. Horizontal Mergers Q i Questions 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 US 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 unnecessary interference Explore these issues in next two chapters distinguish mergers that are horizontal: Bank of America/Fleet vertical: Disney/ABC conglomerate: Gillette/Duracell; Quaker Oats/Snapple Chapter 16: Horizontal Mergers 3
Image of page 3

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

View Full Document Right Arrow Icon
V.I. Horizontal Mergers Merger between firms that compete in the same product k t market some bank mergers hospitals oil companies Begin with a surprising result: the merger paradox take the standard Cournot model merger that is not merger to monopoly is unlikely to be profitable unless “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
Image of page 4
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. l i h i k h 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 But prior to the merger the two firms had total profit of $1 800 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
Image of page 5

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

View Full Document Right Arrow Icon
V.I. Horizontal Mergers A Generalization Take a Cournot market with N identical firms. Suppose that market demand is P = A B Q and that marginal B.Q and that marginal costs of each firm are c. From standard Cournot analysis we know the profit of each firm i ( ) 2 B(N + 1) 2 is: π C i = (A c) Now suppose that firms 1 2 M merge This gives a market The ordering of the firms does not matter Now suppose that firms 1, 2,… M merge. This gives a market in which there are now N M + 1 independent firms.
Image of page 6
Image of page 7
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