DP4831 Mergers with Product Market Risk

Author(s): Albert Banal-Estanol, Marco Ottaviani
Publication Date: January 2005
Keyword(s): market imperfection, mergers and acquisitions, monopolization and horizontal anticompetitive practices, oligopoly
JEL(s): D43, G34, L41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4831

This Paper studies the private incentives and the social effects of horizontal mergers among risk-averse firms. In our model, merging firms are allowed to choose how to split their joint profits, with implications for risk sharing and strategic behaviour in the product market. If firms compete in quantities, consolidation makes firms more aggressive due to improved risk sharing. Mergers involving few firms are then profitable with a relatively small level of risk aversion. With strong enough risk aversion, mergers result in lower prices and higher social welfare. If firms instead compete in prices, consumers do not benefit from mergers with demand uncertainty, but can easily benefit in markets with cost uncertainty.