We present a model that warns against a mechanical comparison of pre- and postmerger prices. The starting point of the article is that both the seller and the buyer take into account how the acquisition price is affected by pre-merger investments. We derive conditions under which the selling of a ﬁrm triggers overinvestment by both the acquirer and the target. Under Cournot competition, linear demand, and quadratic investment costs, we show that these incentives to overinvest can lead to a lower price in a post-acquisition duopoly than in an ongoing triopoly. This ﬁnding suggests a backward-looking efﬁciency defense in the merger control.
Journal of Competition Law and Economics
Ex Post Merger Evaluations and Strategic Pre–Merger Investments
Scientific Article in English