Working Paper: CEPR ID: DP2734
Authors: Lars Persson
Abstract: This Paper shows that predation might help firms overcome the free riding problem of mergers by changing the acquisition situation in the buyer's favour relative to the firms outside the merger. It is also shown that the bidding competition for the prey's assets is most harmful to predators when the use of the prey's assets exerts strong negative externalities on rivals, i.e. when their use severely reduces competitors' profits. The reason is that potential buyers are then willing to pay a high price for the prey in order to prevent other buyers from obtaining the assets. This implies that predators prefer predation technologies that destroy the prey's assets since they limit the negative effects of the subsequent bidding competition for the prey. It is also shown that a restrictive merger policy might be counterproductive, since it might increase the incentives for predation by helping predators avoid the bidding competition. Moreover, the incentive for predation under the US failing firm defence might be strong, since it allows mergers but limits the bidding competition.
Keywords: failing firm defence; merger law; mergers; predation
JEL Codes: K21; L12; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| predation (Q57) | freeriding problem mitigation (H40) |
| predation (Q57) | acquisition dynamics change (C69) |
| acquisition dynamics change (C69) | attractiveness of nonbuyer reduction (D44) |
| bidding competition for prey's assets (D44) | incentives for predation reduction (Q26) |
| negative externalities (D62) | bidding prices increase (D44) |
| restrictive merger laws (K21) | predation incentives increase (Q26) |
| US failing firm defense (F23) | bidding competition limit (D44) |