Working Paper: CEPR ID: DP4831
Authors: Albert Banal-Estañol; Marco Ottaviani
Abstract: This Paper studies the private incentives and the social effects of horizontal mergers among risk-averse firms. In our model, merging firms are allowed to choose how to split their joint profits, with implications for risk sharing and strategic behaviour in the product market. If firms compete in quantities, consolidation makes firms more aggressive due to improved risk sharing. Mergers involving few firms are then profitable with a relatively small level of risk aversion. With strong enough risk aversion, mergers result in lower prices and higher social welfare. If firms instead compete in prices, consumers do not benefit from mergers with demand uncertainty, but can easily benefit in markets with cost uncertainty.
Keywords: mergers; acquisitions; risk aversion; diversification; welfare
JEL Codes: D43; G34; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| merger of equals (G34) | optimal risk diversification (G11) |
| optimal risk diversification (G11) | competitive behavior in the market (L13) |
| merging firms (G34) | aggressive pricing strategies (L11) |
| merger (G34) | lower prices (P22) |
| merger (G34) | higher social welfare (D69) |
| higher risk aversion (D81) | more pronounced merger benefits (G34) |
| cash payment (J33) | less risk diversification (G11) |