Discussion Paper Details

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Title: Bargaining failures and merger policy

Author(s): Roberto Burguet and Ramon Caminal

Publication Date: May 2012

Keyword(s): bargaining, endogenous mergers, merger policy and synergies

Programme Area(s): Industrial Organization

Abstract: In this paper we study the optimal ex-ante merger policy in a model where merger proposals are the result of strategic bargaining among alternative candidates. We allow for firm asymmetries and, in particular, we emphasize the fact that potential synergies generated by a merger may vary substantially depending on the identity of the participating firms. The model demonstrates that, under some circumstances, relatively inefficient mergers may take place. That is, a particular merger may materialize despite the existence of an alternative merger capable of generating higher social surplus and even higher profits. Such bargaining failures have important implications for the ex-ante optimal merger policy. We show that a more stringent policy than the ex-post optimal reduces the scope of these bargaining failures and raises expected consumer surplus. We use a bargaining model that is flexible, in the sense that its strategic structure does not place any exogenous restriction on the dendogenous likelihood of feasible mergers.

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Bibliographic Reference

Burguet, R and Caminal, R. 2012. 'Bargaining failures and merger policy'. London, Centre for Economic Policy Research.