*I have greatly benefited from the comments of the Editor and two anonymous referees. I am also grateful to Jiahua Che, Leonard Cheng, Yuk Fai Fong, Ping Lin, Albert Ma, Jae Hyon Nahm, Mike Riordan and Guofu Tan for helpful comments.
LARGE IS BEAUTIFUL: HORIZONTAL MERGERS FOR BETTER EXPLOITATION OF PRODUCTION SHOCKS*
Version of Record online: 11 APR 2008
© 2008 The Author
The Journal of Industrial Economics
Volume 56, Issue 1, pages 68–93, March 2008
How to Cite
ZHOU, W. (2008), LARGE IS BEAUTIFUL: HORIZONTAL MERGERS FOR BETTER EXPLOITATION OF PRODUCTION SHOCKS. The Journal of Industrial Economics, 56: 68–93. doi: 10.1111/j.1467-6451.2008.00333.x
- Issue online: 11 APR 2008
- Version of Record online: 11 APR 2008
The profitability of horizontal mergers is investigated in a situation in which firms face a production shock and therefore are uncertain about their future costs. I show that, due to production rationalization, small-scale mergers can be profitable if the uncertainty is large. The efficiency gain in production also implies benign welfare consequences. Under cost uncertainty, a profitable merger always improves social welfare if no more than half of the industry's firms are allowed to merge. Finally, I show that the incentives to merge depend on the information structure. Firms are less likely to merge when they possess more information.