LARGE IS BEAUTIFUL: HORIZONTAL MERGERS FOR BETTER EXPLOITATION OF PRODUCTION SHOCKS

To purchase or authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1467-6451.2008.00333.x Byline: WEN ZHOU ([dagger]) Abstract: The profitability of horizontal mergers is investigated in a situation in which firms face a production shock and therefore are uncertain about their future costs. I show that, due to production rationalization, small-scale mergers can be profitable if the uncertainty is large. The efficiency gain in production also implies benign welfare consequences. Under cost uncertainty, a profitable merger always improves social welfare if no more than half of the industry's firms are allowed to merge. Finally, I show that the incentives to merge depend on the information structure. Firms are less likely to merge when they possess more information. Author Affiliation: ([dagger])School of Business, The University of Hong Kong, Pokfulam Road, Hong Kong.e-mail:wzhou@business.hka.hk