The role of divestitures in horizontal mergers

We study the effectiveness of divestitures as a merger remedy. We show that divestitures are more effective in mitigating the market power impact of mergers if the merging firms divest assets to buyers outside the industry rather than existing rivals. Divestitures are also more effective as merger remedies when the merging industry is concentrated and when powerful customers are absent. Notably, stock price reactions of the acquirer and rivals suggest that firms are more concerned with maintaining a competitive edge relative to each other than gaining market power relative to customers.

Automated summary

Divestitures are more effective in mitigating the market power impact of mergers when assets are divested to buyers outside the industry. They are also more effective as merger remedies when the merging industry is concentrated and when powerful customers are absent. Stock price reactions suggest that firms prioritize maintaining competitive edge over gaining market power relative to customers.