Market Power and PreEmptive Acquisitions: Case Analysis of Facebook and Tencent

10 1.1. Industrial economic analysis The analysis of the incentive and the effects of the horizontal merger in our economy has been heavily discussed in the industrial economics literature. The main discussing points are related to the variation of the aggregate profits of the merging firms and the remaining firms (firms outside the mergers that compete in the industry), the equilibrium prices, and the consumer welfare. Looking at different papers we were able to understand that the benefits of merging, and so the incentive to do it, largely depend on the type of market competition (Bernard or Cournot), on the structure of the industry, and the type of firms involved in the merger. Some early theoretical work has been made by Williamson in his article Economies as an Antitrust Defense: The Welfare Trade-offs (1968), in which analyze a merger that leads to an economic advantage due to the synergies and the saving costs, but meantime increases the market power of the merging firms and so increases the price of the good. In this case, the net welfare effects depend on the entity of the two phenomena, and to see a positive effect the reduction of the costs must exceed the price increase. Steiner (1975) adds to the literature that mergers should increase the aggregate profit of the merging firms even if there is an absence of cost efficiency derived by economies of scope or scale. Moving on to research based on the industrial organization model the results are not very clear and sometimes counterintuitive. For instance, taking into consideration the oligopoly model of Cournot, where the competition is based on the output and the assumptions are that the firms have the same marginal cost and undifferentiated products, mergers may reduce aggregate profits of the merging firms due to less production of the new firm if compared to the pre-merger production of the two firms combined (Salant et al, 1983). This will benefit the remaining firms, which at this point will increase their output. Unless there are important synergies in the merging firms that leads to efficiency and costs saving, also the equilibrium price will increase, so even though the total profits of the industry will rise, the merged firms will decrease them, considering that their share of the market has decreased. So, under the Cournot model analysis seems impossible to understand the desirability of conducting a merger, and we agree with Deneckere and Davidson (1985) when they wrote: “We argue that failure to explain the desirability of mergers results from almost exclusive attention to quantity as the basic strategic variable under the firm's control. We feel that price is a much more natural strategic variable than output”.