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Title: Should Mergers Be Controlled?

Author(s): Sven-Olof Fridolfsson and Johan Stennek

Publication Date: February 2001

Keyword(s): Coalition Formation, Competition Policy and Endogenous Mergers And Acquisitions

Programme Area(s): Industrial Organization

Abstract: Anti-competitive mergers benefit competitors more than the merging firms. We show that such externalities reduce firms' incentives to merge (a hold-up mechanism). Firms delay merger proposals, thereby foregoing valuable profits and hoping other firms will merge instead - a war of attrition. The final result, however, is an overly concentrated market. We also demonstrate a surprising inter-temporal link. Merger incentives may be reduced by the prospect of additional profitable mergers in the future. The prospect of a future merger increases the value of becoming an insider in the first merger, which tends to hasten it. The prospect of a future merger may, however, increase the value of becoming an outsider in the first merger even more. If so, the first merger will be delayed by the prospect of the future merger. Merger control may help protect competition. Holdup and inter-temporal links make policy design more difficult, however. Even reasonable policies may be worse than not controlling mergers at all.

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Bibliographic Reference

Fridolfsson, S and Stennek, J. 2001. 'Should Mergers Be Controlled?'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2705