Discussion Paper
No. 2013-62 | December 10, 2013
Nicolas Le Pape and Kai Zhao
Horizontal Mergers and Uncertainty


Some path-breaking work on mergers takes efficiency gains for granted, or assumes that firms have perfect knowledge when taking merger decisions. In practice, firms and competition authorities cannot know exact future efficiency gains, prior to merger consummation. This paper analyzes horizontal mergers when the output decision-making process is sequential. A key assumption is that mergers create uncertainty on productivity and informational asymmetry between firms. The paper also studies whether the merged firm has interest to reveal the information about its own cost to competing firms. In terms of "Merger Approval", the paper emphasizes the timing of regulatory intervention and distinguishes two different merger control interventions (ex ante or ex post enforcement). Since prudent competition authorities (using ex ante intervention) should take the restrictive policy, the framework illustrates why US Horizontal Merger Guidelines and EC Merger Regulation are biased in favor of the consumers’ interests.

JEL Classification:

D21, D80, L20, L40


Cite As

[Please cite the corresponding journal article] Nicolas Le Pape and Kai Zhao (2013). Horizontal Mergers and Uncertainty. Economics Discussion Papers, No 2013-62, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2013-62

Comments and Questions

Anonymous - Referee Report 1
January 16, 2014 - 08:41
see attached file

kai zhao - Answer to the anonymous referee
March 17, 2014 - 06:08
We would like to thank the anonymous referee for helpful comments and suggestions. We will address them in a revised version of our paper.      We propose a model of horizontal mergers with informational asymmetries concerning the production cost of the merged entity. Competing firms can be either leaders or followers and produce an homogeneous product. In a game where the insider behaves as a leader, we assume that an outsider-follower perfectly observe the output level of merged firm and consequently infer the exact value of merged firm’s cost while an outsider who behaves as a leader cannot infer the actual cost of the insider since the two firms define their production decisions during the same stage.     Due to the timing of the output decisions, this information structure is different from the one proposed by Amir et al. (2009) where after a merger no outsider is informed about the merged firm’s cost. This specific design allows us to analyze a merger game in the context of close relationship between the distribution of roles and the information structure. The referee wonder if the increase in the expected profits of informed players with respect to the variance of the cost might be due to errors of uniformed players. This is absolutely right since this increase in the expected profits of informed players reflects the informational advantage these agents benefit when uncertainty on cost goes up. The novel element in the model is that increased uncertainty on the production cost not only benefits to the insider (informed agent) but also to the outsiders when the timing of output decision indirectly transmits information. Nevertheless, we show that the informational advantage of informed players is stranger when the player acts as an insider. If we now consider the impact of uncertainty on the anti-trust authorities decisions (criteria are based on consumer surplus or aggregate welfare), the model demonstrates that when antitrust decisions are taken on the basis of the expected consumer surplus, most of merging scenario which unambiguously increase the consumer surplus also guarantee total welfare enhancement (but the reverse does not hold). This result justify practices of competition authorities based on the criteria of the consumer surplus when the public authority suffers from informational asymmetries We agree with the recommendations concerning consolidation either some subsections (in sections 3 and 4) and some propositions in the text.

kai zhao - Reply to Referee Report 1
April 19, 2014 - 09:58
See attached file

Anonymous - Referee Report 2
April 01, 2014 - 08:18
see attached file

kai zhao - Reply to Referee 2
April 22, 2014 - 12:09
See attached file

Kai Zhao - Revised Version
April 28, 2014 - 08:35
see attached file