Mergers, Agency Costs, and Social Welfare

We examine the impact of a merger to monopoly in a Cournot duopoly framework where managers make cost-reducing investment or effort decisions prior to choosing output. A well-established result is that, absent agency costs, the merger leads to greater investment and lower production costs. We show that, when agency costs are present, this result may be reversed, with mergers leading instead to lower investment/effort, higher production costs, and lower social welfare.