nep-ind New Economics Papers
on Industrial Organization
Issue of 2006‒10‒28
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Merger Simulations of Unilateral Effects : What Can We Learn from the UK Brewing Industry? By Slade, Margaret E.
  2. Buyer Power and Quality Improvements By Battigalli, Pierpaulo; Fumagalli, Chiara; Polo, Michele
  3. Firms Merge in Response to Constraints By Boone, Jan
  4. Non-Parametric Analysis of Efficiency Gains from Bank Mergers in India By Adrian R. Gourlay; Geetha Ravishankar; Tom Weyman-Jones

  1. By: Slade, Margaret E. (Department of Economics, University of Warwick)
    Abstract: I discuss the use of simulation techniques to evaluate unilateral effects of horizontal mergers and the pitfalls that one can encounter when using them. Simple econometric models are desirable because they can be implemented in a short period of time and can be understood by non experts. Unfortunately, their predictions are often misleading. Complex models are more reliable but they require more time to implement and are less transparent. The use of merger simulations and the sensitivity of predictions to modeling choices is illustrated with an application to mergers in the UK brewing industry. There have been a number of brewing mergers that have changed the structure of the UK market, as well as proposed but unconsummated mergers that would have had even more profound effects. I assess two of them: the successful merger between Scottish&Newcastle and Courage and the proposed merger between Bass and Carlsberg–Tetley.
    Keywords: Unilateral effects, horizontal merger simulations, UK brewing
    JEL: L13 L41 L66 L81
    Date: 2006
  2. By: Battigalli, Pierpaulo; Fumagalli, Chiara; Polo, Michele
    Abstract: This paper analyses the sources of buyer power and its effect on sellers’ investment in quality improvements. In our model retailers make take-it-or-leave-it offers to a producer and each of them obtains its marginal contribution to total profits (gross of sunk costs). In turn, this depends on the rivalry between retailers in the bargaining process. Rivalry increases when retailers are less differentiated and when decreasing returns to scale in production are larger. The allocation of total surplus affects the incentives of the producer to invest in product quality, an instance of the hold-up problem. An increase in buyer power not only makes the supplier and consumers worse off, but it may even harm retailers, that obtain a larger share of a smaller surplus. A repeated game argument shows that efficient quality improvements can be supported as an equilibrium outcome if the producer and retailers are involved in a long-term relationship.
    Keywords: buyer power; hold-up; non-cooperative bargaining
    JEL: L13 L4
    Date: 2006–09
  3. By: Boone, Jan
    Abstract: Theoretical IO models of horizontal mergers and acquisitions make the critical assumption of efficiency gains. Without efficiency gains, these models predict either that mergers are not profitable or that mergers are welfare reducing. A problem here is the empirical observation that on average mergers do not create efficiency gains. We analyze mergers in a model where firms cannot equalize marginal costs and marginal revenues over all dimensions in their action space due to constraints. In this type of model mergers can still be profitable and welfare enhancing while they create a loss in efficiency. The merger allows a firm to relax constraints. Further, this set up is consistent with the following stylized facts on mergers and acquisitions: M\&A's happen when new opportunities have opened up or industries have become more competitive (due to liberalization), they happen in waves, shareholders of the acquired firms gain while shareholders of the acquiring firms lose from the acquisition. Standard IO merger models do not explain these empirical observations.
    Keywords: constraints; deregulation; efficiency defence; merger waves; pro/anti-competitive mergers
    JEL: G34 K21 L40
    Date: 2006–07
  4. By: Adrian R. Gourlay (Dept of Economics, Loughborough University); Geetha Ravishankar (Dept of Economics, Loughborough University); Tom Weyman-Jones (Dept of Economics, Loughborough University)
    Abstract: This paper offers an insight into the effectiveness of economic policy reforms in the Indian Banking System by examining the efficiency benefits of mergers among Scheduled Commercial Banks in India over the post-reform period 1991-92 to 2004-05. It does this by using the methodology developed by Bogetoft and Wang (2005). We also provide a metric for judging the success or failure of a merger. Overall, we find that bank mergers in the post-reform period possessed Considerable potential efficiency gains stemming from harmony gains. Post-merger efficiency analysis of the merged bank with a control group of non-merging banks reveals an initial merger related efficiency advantage for the former that, while persistent, did not show a sustained increase this failing to provide merging banks with a competitive advantage vis-a-viz their non-merging counterparts.
    Keywords: Data Envelopment Analysis, Mergers, Banking, Intermediation Approach, Production Approach.
    JEL: C14 G21 G34
    Date: 2006–10

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