DP5977 Industry Concentration and Welfare - On the Use of Stock Market Evidence from Horizontal Mergers

Author(s): Sven-Olof Fridolfsson, Johan Stennek
Publication Date: December 2006
Keyword(s): antitrust, coalition formation, event studies, in-play, mergers & acquisitions
JEL(s): G14, G34, L12, L41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5977

There is diverging empirical evidence on the competitive effects of horizontal mergers: consumer prices (and thus presumably competitors' profits) often rise while competitors' share prices fall. Our model of endogenous mergers provides a possible reconciliation. It is demonstrated that anticompetitive mergers may reduce competitors' share prices, if the merger announcement informs the market that the competitors' lost a race to buy the target. Also the use of 'first rumour' as an event may create similar problems of interpretation. We also indicate how the event-study methodology may be adapted to identiy competitive effects and thus, the welfare consequences for consumers.