Concentration, Mergers and Entry Barriers

Virgilio Devonaire Marco Umipig

On this chapter we will try to answer the following questions: Why do firms in some industries make pure profits? When Oligopolies make pure profits, how come entry of new firms does not always occur, thereby eliminating all pure profits? What can explain mergers among firms in a given industry? What is and what should be the regulators attitudes towards concentrated industries?

Concentration Measures
Compare concentration among different industries in the same or different countries regulating authority would like to intervene or prevent What is a concentrated industry? The number of firms in the industry The distribution of output among the firms , Problems... Market share of firm

The four firm concentration ratio

Merges (takeovers, acquisitions, integration)

Independently owned firms join under the same ownership

We investigate the gains and incentives to merge and consequences on productivity and performance
Three general categories of mergers Horizontal merger Vertical merger

Mergers (takeovers, acquisitions, integration) cont: Top 10 M&A deals worldwide by value (in mil. USD) from 1990 to 1999

Mergers (takeovers, acquisitions, integration) cont

Why do mergers occur? Competition Costs Uncertainty about the future

Horizontal Merger

Horizontal Merger
Under Cournot market structure, a merger among firms leading to an increase in concentration does not necessarily imply an overall welfare reduction. There exist a trade o between product efficiency and the degree of monopolization What would happen if firms play Bertrand?

Vertical Merger

Merger between Supplier of an intermediate good and producer of the final good. Intermediate-good suppliers is called upstream firms Final-good producers is called downstream firms Lets think about the case where upstream and downstream markets are characterized by a Bertrand price competition. Assume Bertrand price competition for the upstream market and Cournot quantity competition for the downstream market.

Downstream Competition

Upstream Competition Before the Merger

Upstream and downstream merge

Upstream and downstream merger

Proposition : A merger between an upstream and downstream firms increases the output level of the merged firms and reduces the output level of the downstream firms that does not merge. Proposition 1 .The combined profit of the merging upstream and downstream firms increase after they merge. 2. A merger between the upstream and the downstream firms will not foreclose the market of the disjoint downstream firms but will only reduce its profit.

Horizontal merger among firms producing complementary goods

Monopoly producing all components

Thank you