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MERGERS UNDER UNCERTAINTY: THE EFFECTS OF DEBT FINANCING *
Author(s) -
SOCORRO M. PILAR
Publication year - 2007
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2007.01031.x
Subject(s) - economics , subsidy , cournot competition , oligopoly , microeconomics , marginal cost , debt , social welfare , welfare , liability , monetary economics , finance , market economy , political science , law
In this paper, we consider a Cournot oligopoly with demand uncertainty, fixed costs and constant marginal costs. The demand uncertainty makes some mergers that would be unprofitable in a certain environment profitable in this model. However, socially advantageous mergers may be still unprofitable for the colluding firms, so public intervention may be needed. One possibility consists in subsidizing such mergers. However, the combination of limited liability debt financing and an appropriate antitrust policy leads to higher social welfare than subsidies. The reason is that, given the limited liability effect, merging parties compete more aggressively, so the reduction in market quantity is mitigated.