Effects of scale economy on merger profitability and efficiency
Date
2004-12-03
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
ORCID
Type
Degree Level
Masters
Abstract
This thesis characterizes how a merger’s profitability and efficiency are affected by its size and by its scale economy factor d in a Cournot market with linear demand and quadratic costs. Our results allow us to challenge the widely believed view among economists that mergers typically are not profitable for the insiders (merged firms). In contrast to the minimum of 80% pre-merger market share required for the insiders to be profitable in Salant, Switzer and Reynolds (1983), our model shows that mergers with much less market share are also profitable. It is worth noting that in the market with diseconomies of scale (i.e., d>0), any two-firm merger could be profitable as long as its scale economy factor is greater than the critical value which is solely determined by the market size n. Our results also allow us to provide useful implications for antitrust laws especially the horizontal merger policy. In our model, mergers with economies of scale (i.e., d>-2 and d
Description
Keywords
Profitability, Scale economy factor, Cournot model, Welfare effects
Citation
Degree
Master of Arts (M.A.)
Department
Economics
Program
Economics