Merger, spin-off and divestiture: insights from a spatial model

Abstract

Mergers and spin-offs are typically opposite strategies for firms, and are not simultaneously profitable in a standard linear Cournot model. We propose a simple spatial Cournot framework, where merger is profitable but subsequent divisionalization is even more. However, this is true only for partial spin-off, not for total divisionalization, due to the opportunity for specific efficiency gains in a spatial setting. Finally, the resulting market structure is analyzed in terms of a post-merger divestiture required by the merger control authority. We show here the divestiture can be profitable for firms even if the merger was not, while still fulfilling its corrective role.divestiture