Endogenous Mergers and Bargaining Failures

Abstract

In this paper we study endogenous mergers in a model of strategic bargaining. We allow for firm asymmetries and, in particular, we emphasize the fact that potential synergies generated by a merger vary depending on the identity of the participating firms. We make two main contributions. The first is to show that relatively inefficient mergers may take place. That is, a particular merger may materialize despite the existence of an alternative merger capable of generating larger synergies and hence higher profits and higher social surplus. Our second contribution is a methodological one. We use a bargaining model that is flexible, in the sense that its strategic structure does not place any restriction on the endogenous likelihood of feasible mergers.