Organic Mergers and Acquisitions

This paper examines the competition between organic and non-organic firms, their incentives to undertake a horizontal merger, and the effect of mergers on firms’ market shares. We also consider an alternative setting where one firm can acquire its rival. For generality, we allow for product differentiation, demand, and cost asymmetries. Our results show that both organic and non-organic firms, despite their cost asymmetries and demand differentials, have incentives to merge under large conditions. When demand and cost differentials are significant, we identify settings under which a firm (either organic or non-organic) purchases its rival, to subsequently shut it down, and yet increase its profits. We then study under which conditions the merger can be welfare improving, which is more likely when goods are highly differentiated and their production costs are relatively symmetric.