Predation, Mergers, and Incomplete Information

This article examines the strategic pricing of duopolists in anticipation of a takeover of one by the other. In equilibrium the acquiring firm may expand its output to signal that it is a low-cost rival and thereby improve the takeover terms. If the merged form will face potential entry, a premerger expansion of output may be necessary to deter entry and to make the merger profitable. In that case the acquiring firm's output expansion increases industry concentration by facilitating the takeover and by deterring entry. This establishes the rationality of predatory output expansions, even when a merger or a takeover is possible and, indeed, anticipated.