The competitive effects of mergers between asymmetric firms

This paper evaluates both efficiency increasing and efficiency decreasing mergers in a procurement setting in which firms differ in the likelihood that they have high production costs. Profitable efficiency increasing mergers often decrease the expected price, but profitable efficiency decreasing mergers always increase it. For a particular pair of firms, there may be no profitable mergers. If there are, then the most profitable merger may decrease efficiency. Consequently, merging firms that are able to choose their postmerger level of efficiency may profitably elect to decrease it. (C) 2004 Elsevier B.V. All rights reserved.