Working Paper: CEPR ID: DP2705
Authors: Sven-Olof Fridolfsson; Johan Stennek
Abstract: Anti-competitive mergers benefit competitors more than the merging firms. We show that such externalities reduce firms' incentives to merge (a hold-up mechanism). Firms delay merger proposals, thereby foregoing valuable profits and hoping other firms will merge instead - a war of attrition. The final result, however, is an overly concentrated market. We also demonstrate a surprising inter-temporal link. Merger incentives may be reduced by the prospect of additional profitable mergers in the future. The prospect of a future merger increases the value of becoming an insider in the first merger, which tends to hasten it. The prospect of a future merger may, however, increase the value of becoming an outsider in the first merger even more. If so, the first merger will be delayed by the prospect of the future merger. Merger control may help protect competition. Holdup and inter-temporal links make policy design more difficult, however. Even reasonable policies may be worse than not controlling mergers at all.
Keywords: coalition formation; competition policy; endogenous mergers
JEL Codes: C78; L12; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticompetitive mergers (L41) | benefit competitors more than merging firms (L21) |
| externalities from a merger (L49) | reduce incentives for firms to merge (L49) |
| holdup mechanism (D86) | delay merger proposals (G34) |
| future merger prospects (G34) | decrease current merger incentives (G34) |
| anticipation of future mergers (G34) | increase value of being an insider in the first merger (G34) |
| merger dynamics (G34) | create an overly concentrated market (D49) |