Tuesday, January 25, 2011
Posted by D. Daniel Sokol
Øystein Foros (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration), Hans Jarle Kind (Dept. of Economics, Norwegian School of Economics and Business Administration), and Greg Shaffer (University of Rochester and University of East Anglia) address Mergers and Partial Ownership.
ABSTRACT: In this paper we compare the profitability of a merger between two firms (one firm fully acquires another) and the profitability of a partial ownership arrangement between the same two firms in which the acquiring firm obtains corporate control over the pricing decisions of the acquired firm. We find that joint profit can be higher in the latter case because it may result in a greater dampening of competition with respect to an outside competitor. We also derive comparative statics on the prices of the acquiring firm, the acquired firm, and the outside firm and use them to explain puzzling features of the pay-TV markets in Norway and Sweden.