Firms Merge in Response to Constraints

TILEC Discussion Paper No. 2006-014

CentER Discussion Paper No. 2006-60

36 Pages Posted: 13 Jul 2006

See all articles by Jan Boone

Jan Boone

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); TILEC

Multiple version iconThere are 2 versions of this paper

Date Written: June 2006

Abstract

Theoretical IO models of horizontal mergers and acquisitions make the critical assumption of efficiency gains. Without efficiency gains, these models predict either that mergers are not profitable or that mergers are welfare reducing. A problem here is the empirical observation that on average mergers do not create efficiency gains. We analyze mergers in a model where firms cannot equalize marginal costs and marginal revenues over all dimensions in their action space due to constraints. In this type of model mergers can still be profitable and welfare enhancing while they create a loss in efficiency. The merger allows a firm to relax constraints. Further, this set up is consistent with the following stylized facts on mergers and acquisitions: M&A's happen when new opportunities have opened up or industries have become more competitive (due to liberalization), they happen in waves, shareholders of the acquired firms gain while shareholders of the acquiring firms lose from the acquisition. Standard IO merger models do not explain these empirical observations.

Keywords: Pro/anti-competitive mergers, efficiency defence, constraints, merger waves

JEL Classification: G34, K21, L40

Suggested Citation

Boone, Jan, Firms Merge in Response to Constraints (June 2006). TILEC Discussion Paper No. 2006-014, CentER Discussion Paper No. 2006-60 , Available at SSRN: https://ssrn.com/abstract=913689 or http://dx.doi.org/10.2139/ssrn.913689

Jan Boone (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2399 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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