Horizontal Mergers and Divestment Dynamics in a Sunset Industry
93 Pages Posted: 7 Mar 2010 Last revised: 30 Aug 2015
Date Written: August 29, 2015
Abstract
In oligopolistic industries, the amount of capital investment is likely to be excessive due to the presence of a business-stealing effect and fixed costs. Similarly, sunset industries with declining demand tend to be riddled with chronic excess capital. The reason is that firms will attempt to free-ride on the reduction of industry supply expected from someone else's divestment, hoping to steal their business. This paper highlights the potential of mergers to internalize this business-stealing effect and thereby promote divestment. Using the case of mergers in the Japanese cement industry, it examines whether such merger-induced divestment improve total welfare. A dynamic model of divestment based on the Markov-perfect equilibrium framework of Ericson and Pakes (1995) is estimated using recently developed econometric methods.Then, a counterfactual experiment is conducted to quantify the welfare impact of mergers.The findings suggests that merged firms indeed more actively closed facilities and that, as a result of these mergers, total welfare improved despite a reduction in the consumer surplus.
Keywords: dynamic discrete game, divestment dynamics, horizontal mergers, sunset industry, cement
JEL Classification: L13, L41, L61
Suggested Citation: Suggested Citation
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