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On Cooperation Through Alliances and Mergers

  • Manel Antelo
  • David PeónEmail author
Article
  • 36 Downloads

Abstract

This paper examines the profitability of alliances and mergers as strategic substitutes for entrepreneurial firms to obtain a cost-cutting advantage. In a Cournot oligopoly with linear demand, constant marginal costs and a subset of firms choosing whether to ally or merge, the preference of a device or the other depends on the number of firms in the industry, their efficiency degree before the agreement, the number of collaborating firms, and the amount of cost saving achieved by the agreement. In general, given the number of firms in the market, an alliance is preferred when the cost-cutting achieved is large and a merge when it is low. Consumers, on the other hand, are always better with an alliance than with a merger. Finally, when aggregate welfare is considered, we characterize the scenarios where socially inefficient mergers or alliances would be implemented. We also discuss two assumptions of the model that might lead to the result that alliances are preferred the more competitors in the industry—a paradox that contradicts the basic tenets of industrial organization theory.

Keywords

Entrepreneurial firms Mergers Alliances Corporate management 

JEL Classification

G34 D02 L13 

Notes

Acknowledgements

The authors would like to thank Kai Hueschelrath (the Editor-in-chief) and three anonymous reviewers for the fruitful suggestions provided. The authors gratefully acknowledge the financial support received from the Xunta de Galicia (Spain) through Research Project ED431B2016/001 Consolidación e estruturación–2016 GPC GI-2016 Análise económica dos mercados e institucións. This research has also received the funding of the program for the “Consolidation and Structuring of Competitive Research Units—Research Networks (Redes de Investigación)” (Ref. ED341D R2016/014), Proxectos Plan Galego IDT, from the Xunta de Galicia (Spain).

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Departamento de Fundamentos da Análise EconómicaUniversidade de Santiago de CompostelaSantiago de CompostelaSpain
  2. 2.Department of BusinessUniversity of A CorunaA CoruñaSpain

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