DP8989 Bargaining failures and merger policy

Author(s): Roberto Burguet, Ramon Caminal
Publication Date: May 2012
Keyword(s): bargaining, endogenous mergers, merger policy, synergies
JEL(s): L13, L41
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8989

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.