On the Relationship between Merger Profitability and the Degree of Competition
- By Marc Escrihuela Villar1
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View Affiliations Hide Affiliations1 Departamento de Economia Aplicada, Edificio Jovellanos Ctra. Valldemossa km.7.5, 07122 Palma de Mallorca (Islas Baleares), Spain.
- Source: Firms' Strategic Decisions: Theoretical and Empirical Findings: Volume 1 , pp 26-38
- Publication Date: April 2015
- Language: English
On the Relationship between Merger Profitability and the Degree of Competition, Page 1 of 1
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We use the conjectural variations solution to analyze the profitability of horizontal mergers as a function of the degree of competition. We prove that any merger can be profitable if the environment is relatively competitive since in industries that are already cooperating, a merger loses attractiveness as an anti-competitive device. We also derive two welfare results: (i) mergers are socially beneficial if the competition is intense enough and (ii) any welfare enhancing merger is also profitable if the proportion of firms involved in the merger is relatively large. Finally, we obtain that the presence of free entry raises merger profitability only when the degree of competition is low enough.
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