ch16 - Horizontal Mergers Chapter 16 Horizontal Mergers 1...

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Chapter 16: Horizontal Mergers 1 Horizontal Mergers

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Chapter 16: Horizontal Mergers 2 Introduction Merger mania of 1990s disappeared after 9/11/2001 But now appears to be returning Oracle/PeopleSoft 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 3 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 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

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Chapter 16: Horizontal Mergers 4 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 take the standard Cournot model merger that is not merger to monopoly is unlikely to be profitable 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 5 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 But prior to the merger the two firms had aggregate profit of \$1,800 This merger is unprofitable and should not occur

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Chapter 16: Horizontal Mergers 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 that the profit of each firm is: π 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
Chapter 16: Horizontal Mergers 7 Generalization 2 Each non-merged firm chooses output q i to maximize profit: π 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

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ch16 - Horizontal Mergers Chapter 16 Horizontal Mergers 1...

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