The Welfare Impact of New Firm Acquisitions.

Abstract

Despite a large volume of studies examining the welfare impact of acquisitions, there are not many studies that model the welfare impact of acquiring new firms. This study offers a review of the literature and presents a framework for evaluating the welfare impact of the acquisition of new firms. Our results suggest that the acquisition of new firms is not necessarily welfare reducing as long as (1) the number of new firm entry is within a given range (i.e., not too many and not too few), (2) sufficient oligopolistic interdependence is present (output response from firms not involved in the acquisition or outsider firms), and (3) there are cost symmetries. The key factor that makes the privately beneficial acquisition welfare enhancing is the profit opportunity for outsider firms and oligopolistic interdependence, given the restriction on the number of new firms. Our findings imply that, under the given conditions, start-up acquisitions may not need to be restricted by merger control policies. Our literature review and model highlight the need for regulators to pay attention to the specific number of new firms that enter a given market when there are no cost synergies.