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Mergers with Product Market Risk
Author(s) -
BanalEstañol Albert,
Ottaviani Marco
Publication year - 2006
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2006.00111.x
Subject(s) - diversification (marketing strategy) , consolidation (business) , risk aversion (psychology) , business , microeconomics , industrial organization , welfare , economics , monetary economics , financial economics , marketing , finance , expected utility hypothesis , market economy
This paper studies the causes and the consequences of horizontal mergers among risk‐averse firms. The amount of diversification depends on the allocation of shares among the merging firms, with a direct risk‐sharing effect and an indirect strategic effect. If firms compete in quantities, consolidation makes firms more aggressive. Mergers involving few firms are then profitable with a relatively low level of risk aversion. With strong enough risk aversion, mergers reduce prices and improve social welfare. If firms instead compete in prices, consumers do not benefit from mergers in markets with demand uncertainty, but can easily benefit with cost uncertainty.