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Lecture 7: Horizontal Mergers (Profitability of horizontal mergers…
Lecture 7: Horizontal Mergers
Mergers
horizontal mergers
vertical mergers: firms in different stages of value chain
conglomerate mergers: firms in unrelated industries
why?
reduce competition
empire building
create synergies
Concentration measures (related to market power)
I(c) = 1/ N
four- firm concentration ratio (p.8)
HHI
Lerner Index = HHI/ elasticity (only works with Cournot competition)
Profitability of horizontal mergers
Pre- merger equilibrium (p.15)
Post- merger equilibrium (p.17)
merging and non- merging firms (p.19)
Interaction between merging and non- merging firms (p.21)
horizontal mergers
without synergy or cost reduction
(p.22)
Horizontal merger with synergy
post- merger equilibrium (p.28)
Other types of profitable mergers (p.31)
merger between firms producing
differentiated products
?
Welfare effect
Merger and consumer surplus (p.33)
Compare profitable merger and CS- improving merger (p.35)
Use total surplus as welfare standard
Diagram p.37
A represents loss
B represents gain
Merger Control
Determine the relevant market: increase in price to see what happens in other markets (substitute or not)
Use HHI to evaluate mergers (HHI is so confused)
Coordinated effects
: increase the likelihood of collusion
Unilateral effects
: as a result of merger, less competition, more market power for merged entity => price increases
Merger clearance
entry into the relevant market is easy
efficiency outcome