Firms Merge in Response to Constraints

38 Pages Posted: 23 Aug 2006

See all articles by Jan Boone

Jan Boone

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

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Date Written: July 2006


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, deregulation

JEL Classification: G34, K21, L40

Suggested Citation

Boone, Jan, Firms Merge in Response to Constraints (July 2006). CEPR Discussion Paper No. 5744, Available at SSRN:

Jan Boone (Contact Author)

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

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

Centre for Economic Policy Research (CEPR)

United Kingdom

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE

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