Essays on endogenous merger theory

Abstract: This thesis consists of a collection of essays on endogenous merger theory.Why Mergers Reduce Profits, and Raise Share Prices - A Theory of Preemptive Mergers. The empirical puzzle why mergers reduce profits, and raise share prices is explained in this essay. If being an "insider" is better than being an "outsider," firms may merge to preempt their partner merging with a rival. The stock-value of the insiders is increased, since the risk of becoming an outsider is eliminated. These results are derived in an endogenous merger model.Why Event Studies Do Not Detect Anti-Competitive Mergers. Anti-competitive mergers increase competitors' profits, since they reduce competition. Using a model of endogenous mergers, it is shown that such mergers nevertheless may reduce the competitors' share-prices. Thus, event-studies can not detect anti-competitive mergers.Should Mergers be Controlled? Anti-competitive mergers benefit competitors more than the merging firms. Such externalities are shown to reduce firms' incentives to merge (a holdup mechanism). Firms delay merger proposals, thereby foregoing valuable profits and hoping other firms will merge instead - a war of attrition. The final result, however, is an overly concentrated market. This essay also demonstrates a surprising intertemporal link: merger incentives may be reduced by the prospect of additional profitable mergers in the future. Merger control may help protect competition. Holdup and intertemporal links make policy design more difficult, however. Even reasonable policies may be worse than not controlling mergers at all.Anti-Competitive versus Pro-Competitive Mergers. In a framework where mergers are mutually excluding, firms are shown to pursue anti-competitive rather than (alternative) pro-competitive mergers. Potential outsiders to anti-competitive mergers refrain from pursuing pro-competitive mergers if the positive externalities from anti-competitive mergers are strong enough. Potential outsiders to pro-competitive mergers pursue anti-competitive mergers if the negative externalities from the pro-competitive mergers are strong enough. Potential participants in anti-competitive mergers are cheap targets due to the risk of becoming outsiders to pro-competitive mergers. Firms may even pursue an unprofitable and anti-competitive merger, when alternative mergers are profitable and pro-competitive.A Consumers' Surplus Defense in Merger Control. A government wanting to promote an efficient allocation of resources as measured by the total surplus, should strategically delegate to its competition authority a welfare standard with a bias in favour of consumers. A consumer bias means that some welfare increasing mergers will be blocked. This is optimal, if the relevant alternative to the merger is another change in market structure that will even further increase the total surplus. Furthermore, a consumer bias is shown to be optimal even though it increases the likelihood of forbidding mergers that maximize the total surplus