Thursday, June 21, 2012
Posted by D. Daniel Sokol
Dirk Hackbarth, University of Illinois at Urbana-Champaign - College of Business and Bart Taub, University of Illinois ask Does the Dearth of Mergers Mean More Competition?
ABSTRACT: We study mergers incentives in a duopoly with differentiated products and noisy observations of firms' actions. Firms select dynamically optimal actions that are not static best responses and merger incentives arise endogenously when firms sufficiently deviate from their collusive actions. Depending on the merger costs, there are three merger equilibria: if the cost is low, firms merge immediately, if it is high, they never merge, and, in an intermediate cost range, there are endogenous mergers for which we derive a number of results. First, we characterize the firms’ shares in the merged firm as a function of firm and product market characteristics. Second, the hazard rate for a merger decreases — so that the probability of a merger over any fixed time span decreases — as the fixed cost of merging decreases. This is because the more valuable merger option increases the stability of pre-merger collusion, causing it to persist, and hence the dearth of mergers need not mean more product market competition. Third, the acquiring firm's pre-merger returns are first positive and then become negative just before the merger occurs, while the target firm's returns follow the opposite pattern. Fourth, there are no announcement returns.