“Mergers, Managerial Efficiency, and Social Welfare” by Thomas Ross
University of British Columbia
Jean-Etienne de Bettignies
We examine the impact of a merger to monopoly in a Cournot duopoly framework where managers exert cost-reducing effort prior to choosing output. Absent agency costs, the merger has a well-known "Schumpeterian" effect leading to increased effort and lower costs. However, when agency costs are present, the Schumpeterian effect of the merger is dominated by increased agency costs, leading instead to lower effort, higher costs, and lower social welfare. We then discuss how our analysis might inform the evaluation of real mergers, with reference to the Superior Propane – ICG Propane merger in Canada.