The purpose of this discussion paper is to contribute to the analysis of two questions. Should a merger control system take into account efficiency gains from horizontal mergers, and balance these gains against the anti-competitive effects of mergers? If so, how should a system be designed to account for efficiency gains? The report is divided into five separate parts. The discussion paper is based on a report to the European Commission. To help answer the two questions we start with an extensive review of the relevant economic research, including both theoretical and empirical work. Next, we review the current practice in seven O.E.C.D. jurisdictions. Finally, we propose a merger control system, emphasising the central role of informational limitations.
We provide a possible explanation for the empirical puzzle that mergers often reduce profits, but raise share prices. If being an "insider" is better than being an "outsider", firms may merge to preempt their partner merging with a rival. The insiders' stock market value is increased, since the risk of becoming an outsider is eliminated. These results are derived in an endogenousmerger model, predicting the conditions under which mergers occur, when they occur, and how the surplus is shared. (JEL: L13, L41, G34, C78) 1. The early literature was surveyed by Ruback (1983), andJarrell, Brickley, andNetter (1988). It contained some debate concerning the effect of merger on the aggregate value of the merging firms. Later contributions more clearly indicate that this effect is positive, see e.g.,
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