Abstract:
This paper studies how an outsider can strategically induce a merger between rival firms. The outsider's anticipated post-merger output expansion lets it capture part of the gains from the merger but can also make the merger unprofitable for the insiders. We show that the outsider can make the merger profitable by committing in advance to a weaker competitive position, while the softer competition following the merger can more than compensate it for its self-imposed handicap. A general framework identifies conditions under which the outsider optimally chooses the minimum merger-inducing handicap. Three Cournot models show that voluntary capacity reduction, withdrawal from a profitable market, and a credible increase in marginal cost can each strictly raise the outsider's profit above the no-handicap, no-merger benchmark. Merger synergies can also benefit the outsider by reducing the handicap required to induce the merger. The analysis highlights the need to account for endogenous outsider constraints in ex ante assessments of mergers.
