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On Cooperation Through Alliances and Mergers

On Cooperation Through Alliances and Mergers This paper examines the profitability of alliances and mergers as strategic substitutes for entrepreneurial firms to obtain a cost-cutting advantage. In a Cournot oligopoly with linear demand, constant marginal costs and a subset of firms choosing whether to ally or merge, the preference of a device or the other depends on the number of firms in the industry, their efficiency degree before the agreement, the number of collaborating firms, and the amount of cost saving achieved by the agreement. In general, given the number of firms in the market, an alliance is preferred when the cost-cutting achieved is large and a merge when it is low. Consumers, on the other hand, are always better with an alliance than with a merger. Finally, when aggregate welfare is considered, we characterize the scenarios where socially inefficient mergers or alliances would be implemented. We also discuss two assumptions of the model that might lead to the result that alliances are preferred the more competitors in the industry—a paradox that contradicts the basic tenets of industrial organization theory. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png "Journal of Industry, Competition and Trade" Springer Journals

On Cooperation Through Alliances and Mergers

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References (46)

Publisher
Springer Journals
Copyright
Copyright © 2019 by Springer Science+Business Media, LLC, part of Springer Nature
Subject
Economics; Industrial Organization; Economic Policy; R & D/Technology Policy; European Integration; Microeconomics; International Economics
ISSN
1566-1679
eISSN
1573-7012
DOI
10.1007/s10842-018-0289-0
Publisher site
See Article on Publisher Site

Abstract

This paper examines the profitability of alliances and mergers as strategic substitutes for entrepreneurial firms to obtain a cost-cutting advantage. In a Cournot oligopoly with linear demand, constant marginal costs and a subset of firms choosing whether to ally or merge, the preference of a device or the other depends on the number of firms in the industry, their efficiency degree before the agreement, the number of collaborating firms, and the amount of cost saving achieved by the agreement. In general, given the number of firms in the market, an alliance is preferred when the cost-cutting achieved is large and a merge when it is low. Consumers, on the other hand, are always better with an alliance than with a merger. Finally, when aggregate welfare is considered, we characterize the scenarios where socially inefficient mergers or alliances would be implemented. We also discuss two assumptions of the model that might lead to the result that alliances are preferred the more competitors in the industry—a paradox that contradicts the basic tenets of industrial organization theory.

Journal

"Journal of Industry, Competition and Trade" – Springer Journals

Published: Jan 3, 2019

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