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LARGE IS BEAUTIFUL: HORIZONTAL MERGERS FOR BETTER EXPLOITATION OF PRODUCTION SHOCKS

Authors


  • *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.

Abstract

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.

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