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Allocating Investments in Conglomerate Mergers: A Game Theoretic Approach

Author

Listed:
  • Jose de Jesus Herrera-Velasquez

    (Graduate School of Economics, Kyoto University)

Abstract
We develop a model of conglomerate mergers. There are two markets that are not related horizontally or vertically. Each market has an oligopoly structure where the firms compete in a Cournot fashion. The firms cannot merge with a firm in the same market, but they are able to with a firm in a different market. Without a merger, we assume that only the firms in one of the markets can invest in technology to reduce the cost of production. After the merger, the new formed conglomerate is able to use the technology in both markets. Using the technology has a cost of opportunity in the merger scenario, hence the conglomerate has to decide how to allocate the technology across both markets. The model predicts that in a monopoly benchmark, the incentives to allocate the technology are to reduce the costs in the markets with better prospects of prots. In an oligopoly structure, the firms merge if they have incentives to transfer the technology from the original market either to invest in the better markets or to avoid technological competition. We fully characterize how the markets' size and the technological compatibility determine the equilibrium market outcomes and the underlying merger decisions. We derive welfare implications of the equilibria.

Suggested Citation

  • Jose de Jesus Herrera-Velasquez, 2020. "Allocating Investments in Conglomerate Mergers: A Game Theoretic Approach," KIER Working Papers 1038, Kyoto University, Institute of Economic Research.
    • Handle: RePEc:kyo:wpaper:1038
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP1038.pdf
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    References listed on IDEAS

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    Keywords

    Conglomerate Mergers; Corporate Diversication; Game Theory; Resources; Multimarket Competition;
    All these keywords.

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