DP5977 Industry Concentration and Welfare - On the Use of Stock Market Evidence from Horizontal Mergers

Author(s): Sven-Olof Fridolfsson , Johan Stennek

Publication Date: December 2006

Keyword(s): mergers & acquisitions , event studies , antitrust , in-play , coalition formation

JEL(s): G14 , G34 , L12 , L41

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP5977.asp.asp

There is diverging empirical evidence on the competitive effects of horizontal mergers: consumer prices (and thus presumably competitors' profits) often rise while competitors' share prices fall. Our model of endogenous mergers provides a possible reconciliation. It is demonstrated that anticompetitive mergers may reduce competitors' share prices, if the merger announcement informs the market that the competitors' lost a race to buy the target. Also the use of 'first rumour' as an event may create similar problems of interpretation. We also indicate how the event-study methodology may be adapted to identiy competitive effects and thus, the welfare consequences for consumers.