International College of Economics and Finance

Research seminar by Bart Taub (Durham University): «Does the dearth of mergers mean more competition?»

On Thursday, October 25 at 4.30 pm International College of Economics and Finance held Research seminar.
Speaker: Bart Taub (Durham University) 
Theme: «Does the dearth of mergers mean more competition?», joint with Dirk Hackbarth
Venue:Pokrovski Bulvar, 11, Room Zh-822

Abstact: We study a dynamic model of endogenous mergers motivated by strategic interactions in a stochastic market with differentiated products. Firms' continuation values are driven by their noisy observations of each other's actions along an equilibrium boundary set of an ordinary differential equation that characterizes their equilibrium strategies. As a result, firms have incentives to select dynamically optimal actions that are not static best responses. Incentives to merge arise endogenously when their dynamically optimal actions sufficiently deviate from their collusive actions. Perhaps surprisingly, not observing mergers need not imply less collusive behavior. In particular, depending on the magnitude of the fixed cost of merging, there exist three types of equilibria for the dynamic game. If the cost is sufficiently low, firms merge immediately, and conversely if the cost is sufficiently high, firms never merge. In an intermediate range of cost, there are endogenous mergers. Based on the endogenous merger equilibrium, the dynamic model generates a number of novel and testable predictions. First, we characterize the firms' relative shares in the merged firm as a function of the pre-merger product market characteristics, such as product differentiation, market share, profitability, and volatility. Second, the hazard rate for the merger decreases, so that the probability of a merger in any fixed time span decreases as the fixed cost of merging decreases. This is because the impact of the merger boundary increases the stability of pre-merger collusion and thus causes it to persist. Third, the acquiring firm's pre-merger returns are generally first positive and then become negative just before the merger occurs, while the target firm's returns follow the opposite pattern.

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