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Distributive inefficiency in horizontal mergers: Evidence from wealth transfers between merging firms and their customers

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  • Gao, Ning
  • Peng, Ni
  • Zhang, Yi

Abstract

The ultimate goal of antitrust enforcement is to maximize the surplus consumers enjoy by enhancing production efficiency and eliminating market power. Previous literature focuses on the average net wealth effects on merging firms and their stakeholder firms and reports evidence of efficiency gains while no evidence of market power in horizontal mergers. In this paper, we examine how efficiency gains distribute between the merging firms and their customer firms. We find a significant negative relation between the combined abnormal returns on the merging firms and those on their customer firms, demonstrating a wealth transfer effect. Such a negative relation is more pronounced when market power is likely to be more intensive. On average, the merging firms gain, and their customers do not lose. Our results suggest that market power allows merging firms to withhold merger gains that would have been passed to the downstream under perfect competition and prevents customers from enjoying the whole consumer surplus. Distributive inefficiency exists in horizontal mergers.

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  • Gao, Ning & Peng, Ni & Zhang, Yi, 2021. "Distributive inefficiency in horizontal mergers: Evidence from wealth transfers between merging firms and their customers," International Review of Financial Analysis, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002623
    DOI: 10.1016/j.irfa.2021.101941
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    More about this item

    Keywords

    Distributive inefficiency; Consumer surplus; Market power; Mergers and acquisitions; Wealth transfer;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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