DP2734 Predation and Mergers: Is Merger Law Counterproductive?

Author(s): Lars Persson
Publication Date: March 2001
Keyword(s): Failing Firm Defence, Merger Law, Mergers, Predation
JEL(s): K21, L12, L41
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2734

This Paper shows that predation might help firms overcome the free riding problem of mergers by changing the acquisition situation in the buyer's favour relative to the firms outside the merger. It is also shown that the bidding competition for the prey's assets is most harmful to predators when the use of the prey's assets exerts strong negative externalities on rivals, i.e. when their use severely reduces competitors' profits. The reason is that potential buyers are then willing to pay a high price for the prey in order to prevent other buyers from obtaining the assets. This implies that predators prefer predation technologies that destroy the prey's assets since they limit the negative effects of the subsequent bidding competition for the prey. It is also shown that a restrictive merger policy might be counterproductive, since it might increase the incentives for predation by helping predators avoid the bidding competition. Moreover, the incentive for predation under the US failing firm defence might be strong, since it allows mergers but limits the bidding competition.