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Multidivisional firms, internal competition, and the merger paradox

Author

Listed:
  • Anthony Creane
  • Carl Davidson
Abstract
. Traditional modelling of mergers has the merged firms (insiders) cooperate and maximize joint profits. This approach has several unappealing results in quantity‐setting games, for example, mergers typically are not profitable for insiders, but are profitable for non‐merging firms (outsiders). We take a different approach and allow for a parent company that can play each insider off one another. In quantity‐setting games, with our approach mergers are profitable for insiders, unprofitable for outsiders, socially beneficial, and involve (in a non‐monopolizing merger) a small number of firms. Finally, we find that the optimal strategy depends on whether firms compete in quantity or prices. JEL classification: L000 Entreprises multi‐divisionnelles, concurrence interne, et le paradoxe des fusions. Les modélisations conventionnelles des fusions suggèrent que les entreprises fusionnées (parties prenantes) coopèrent et maximisent leurs profits conjoints. Cette approche engendre plusieurs résultats contre‐intuitifs dans des jeux de concurrence par les quantités, i.e. les fusions en général ne sont pas profitables pour les parties prenantes mais sont profitables pour des entreprises qui ne sont pas fusionnées (les autres). Les auteurs adoptent une approche différente qui permet à l’entreprise mère de jouer les parties prenantes l’une contre l’autre. Dans ce genre de jeu, avec l’approche adoptée, les fusions sont profitables pour les parties prenantes, non profitables pour les autres, socialement bénéfiques, et impliquent un petit nombre d’entreprises dans une fusion qui ne crée pas un monopole. Finalement, on trouve que la stratégie optimale dépend fondamentalement du fait que les entreprises se concurrencent par les prix ou par les quantités.

Suggested Citation

  • Anthony Creane & Carl Davidson, 2004. "Multidivisional firms, internal competition, and the merger paradox," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(4), pages 951-977, November.
    • Handle: RePEc:wly:canjec:v:37:y:2004:i:4:p:951-977
    DOI: 10.1111/j.0008-4085.2004.00255.x
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    JEL classification:

    • L0 - Industrial Organization - - General

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