Mergers with Product Market Risk


  • We are grateful to Marcus Asplund, Thomas de Garidel-Thoron, Denis Gromb, David Harbord, Morten Hviid, Inés Macho-Stadler, Stephen Salant, Jo Seldeslacths, a coeditor, and two anonymous referees for useful comments and suggestions. We have also benefited from the comments of seminar participants at London Business School, Universitat Autònoma de Barcelona, Simposio de Análisis Económico 2003 (Sevilla), ESEM 2004 (Madrid), EARIE 2004 (Berlin), and Jornadas de Economía Industrial 2004 (Granada).


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.