The Economics of Corporate Governance and Mergers

The Economics of Corporate Governance and Mergers

Edited by Klaus Gugler and B. Burcin Yurtoglu

This book provides an insightful view of major issues in the economics of corporate governance (CG) and mergers. It presents a systematic update on the developments in the two fields during the last decade, as well as highlighting the neglected topics in CG research, such as the role of boards, CG and public interest and the relation of CG to mergers. Two important conclusions can be drawn from this book: the first is that corporate governance systems that better align shareholders’ and managers’ interests lead to better corporate performance; second, there is an important relationship between CG structures and the quality of firm decision-making, one of the most important being the decision to merge or take over another firm.

Chapter 12: Endogenous Horizontal Mergers in Dynamic Markets

Engelbert J. Dockner, Andrea Gaunersdorfer and Steffen Jørgensen

Subjects: business and management, corporate governance, economics and finance, corporate governance


Engelbert J. Dockner, Andrea Gaunersdorfer and Steffen Jørgensen 1 INTRODUCTION Traditionally, the consequences of mergers are studied in a static framework where a merger is modeled as an exogenous change of the number of firms in the industry. In terms of horizontal mergers, one of the first papers studying the welfare consequences of an increase in market concentration was Salant, Switzer and Reynolds (1983) (SSR). They show that in a static Cournot game with linear demand and cost functions, mergers are unprofitable unless they involve at least 80 per cent of the firms in the industry. Following this somewhat counter-intuitive result, a series of papers have analyzed the profitability of exogenous mergers and found that the SSR conclusion rests on two assumptions. First, Deneckere and Davidson (1985) show that if firms produce differentiated products and set prices instead of quantities, any price increase by the merging firms is matched by the outsiders and hence a merger becomes profitable. Second, the conclusion of SSR is linked to the modeling of the cost structures. If the merging entity can exploit scale economies of the merging firms, cost reductions ensure the profitability of mergers. Perry and Porter (1985) present a model that builds on these arguments: merging firms own a tangible asset, acquired from the merging partners, so that a merged firm can increase output at a given level of average costs and hence benefit from the merger. Dockner and Gaunersdorfer (2001) study exogenous mergers...

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