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About the article
Published Online: 2013-08-24
Capron (1999) pointed out the significant risk of damaging acquisition performance when the divested assets and redeployed resources are those of the target.
Perry and Porter (1985) investigated the impact of a horizontal merger that causes a cost reduction through aggregating the capital of the merging firms. Fumagalli and Vasconcelos (2009) extended this to the discussion of international mergers. Those articles cannot investigate how a horizontal merger changes the strategic interaction of efforts on cost-reducing activities. Farrell and Shapiro (1990) comprehensively investigated the effect of the change in the output through a horizontal merger. One of our main concerns is how firms execute horizontal mergers under Cournot competition with R&D although the properties in Farrell and Shapiro (1990) are shared with those in our article.
Ziss (1994) discussed a merger under a duopoly case in which two firms engage in R&D with spillover. Kabiraj and Mukherjee (2000) considered the case in which two firms with the same ex ante marginal cost engage in R&D and then decide whether to merge given the outcome of R&D is determined. Mukherjee (2006) discussed the effect of cross-border mergers on R&D and welfare. Jost and van der Velden (2008) also discussed the effect of horizontal mergers when firms engage in R&D investments for a patent race with spillover.
Friberg, Norbäck, and Persson (2012) and Phillips and Zhdanov (2013) captured the bidding behavior of firms in an acquisition process after firms engage in R&D. These articles mainly focus on the strategic aspect of premerger R&D. We discuss the relationship between those articles and ours in Section 4.
Sinha (2006) also discussed the effect of horizontal mergers when the outcome of R&D can be private information. Atallah (2005) analyzed merger profitability in the case of cost-reducing R&D. In his numerical example, however, R&D investment does not provide incentives for mergers in most cases.
We do not consider heterogeneity of R&D investment costs; that is, is common to all firms. Although incorporating this matter would be important, it complicates the analysis in this article. Moreover, we guess that this type of heterogeneity would have a similar effect on the incentive to merge as ex ante cost heterogeneity.
Throughout the article, we study the pairwise mergers, which means that mergers consist of two firms.
This criterion is consistent with the equilibrium concept of the core (see Horn and Persson 2000, 2001). In fact, when the firms are homogeneous, an allocation involving a merger that satisfies this criterion is in the core under the restriction of a pairwise merger. In the next section, where we introduce firm heterogeneity, we use the core as an equilibrium concept and provide an analysis of the equilibrium.
A change in the market share due to a pairwise merger is given by
See Horn and Persson (2001) for a detailed discussion on these points.
Although the discussion is not reported in this article, the result is available upon request.
They show that the strategic trade policy induces the domestic firms’ merger, because a domestic merger induces government to give subsidies to the merged domestic firm.