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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26208
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| Title: | Horizontal Mergers With Free-Entry: Why Cost Efficiencies May Be a Weak
Defense and Asset Sales a Poor Remedy |
| Authors: | Cabral, Luis M.B. |
| Keywords: | Mergers
Entry
E±ciencies
Asset Sales |
| Issue Date: | Mar-2001 |
| Series/Report no.: | EC-01-05 |
| Abstract: | I analyze the effects of a merger between two firms in a spatially
differentiated oligopoly. I make the crucial assumption that the
industry is at a free-entry equilibrium both before and after the
merger. In particular, I allow for the possibility of entry subsequent
to the merger. Not surprisingly, this possibility improves the effect of
the merger on consumer welfare. More importantly, I show that
post-merger entry dramatically shifts the perspective on cost
efficiencies as a merger defense and asset sales as a remedy. Cost
efficiencies (in the form of lower marginal cost) decrease the
likelihood of entry, and thus benefit consumers less than if entry
conditions were exogenously given. Likewise, by selling assets (stores)
to potential rivals, merging firms effectively \buy them o®,"
that is, dissuade them from opening new stores, an effect that is
detrimental to consumers. |
| URI: | http://hdl.handle.net/2451/26208 |
| Appears in Collections: | Economics Working Papers
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