Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 541: Should Mergers be Controlled?

Sven-Olof Fridolfsson () and Johan Stennek
Additional contact information
Sven-Olof Fridolfsson: The Research Institute of Industrial Economics, Postal: P.O Box 5501, SE-114 85 Stockholm, Sweden
Johan Stennek: The Research Institute of Industrial Economics, Postal: P.O Box 5501, SE-114 85 Stockholm, Sweden

Abstract: Anticompetitive mergers benefit competitors more than the merging firms. We show that such externalities reduce firms' incentives to merge (a holdup mechanism). Firms delay merger proposals, thereby foregoing valuable profits and hoping other firms will merge instead - a war of attrition. The final result, however, is an overly concentrated market. We also demonstrate a surprising intertemporal link: Merger incentives may be reduced by the prospect of additional profitable mergers in the future. Merger control may help protect competition. Holdup and intertemporal links make policy design more difficult, however. Even reasonable policies may be worse than not controlling mergers at all.

Keywords: Endogenous Mergers & Acquisitions; Coalition Formation; Competition Policy

JEL-codes: C78; L12; L41

40 pages, December 14, 2000

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