DP1544 Endogenous Mergers in Concentrated Markets

Author(s): Henrik Horn, Lars Persson
Publication Date: December 1996
Keyword(s):
JEL(s):
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1544

The merger literature almost exclusively considers mergers between exogenously specified firms. This paper proposes an approach to predict the pattern of mergers in situations where different mergers are feasible. It generalizes the traditional industrial organization approach, employing ideas on coalition-formation from cooperative game theory. The model suggests that in concentrated markets, equilibrium mergers are conducive to market structures with large industry profits, thus pointing to an inherent conflict between private and socially-correct merger incentives. While applying the model, light is also thrown on formation of research joint ventures, mergers between quantity-constrained firms, and tariff-jumping foreign direct investment.