Financial crisis and M&A in vertical markets: Some theoretical considerations∗

This paper explores the incentives of a market leader in undertaking merger and acquisition (M&A) of its bankrupt rival firm under financial crisis in an oligopoly model of vertical product differentiation with heterogeneous consumers. I find that, such an M&A only arises if there are cost cutting benefits; else, the market leader would optimally behave like a natural monopoly. I also find that the market leader has a stronger incentive to undertake M&A of its bankrupt rival firm when the market leader is a state-owned enterprise than when it is a private company, and such an M&A always enhances social welfare. These results, which are consistent across Bertrand and Cournot modes of competition, suggest important roles played by antitrust authorities in supporting or facilitating M&A during an economic downturn. JEL classification: D42, D43, L11, L42