The Endogenous Model Under Competition Among Local Governments

In this paper, based on extended Cournot Model, using the modeling way of endogenous merger, we study the merger choices of companies when local government interposes. We expand the traditional way of studying merger, whose example is limited in the successful mergers. We analyze the reasons that some mergers that are profitable for both companies fails finally. What we are interested in is not the goodness that a merger brings to the companies or factors that may affect the profit that companies can get from one merger,but why merger happens and when merger can happen. In this paper, we try to explain the following three questions:the first is that can mergers among local-stated companies in different areas achieve? The second is that although there exists scale effect, why mergers among local-stated companies in different areas are hard to achieve in reality? The third one is that why local government hopingly promotes the local-stated-companies to merger the private companies in the same area? By the model, at least we explain the above three questions from the point of local government competition.First,the competition among local government wound not block mergers between local stated-companies in different areas, with one precondition that local government is an economic man who pursues the profit of companies, no matter maximizing the absolute profit or relative.Next,the government's two roles of highest administrative leader and staking shareholder of local stated-companies make the government not only consider the profit of the local stated-companies, but also the other economic indexes like unemployment rate etc. So the government would use the companies as a tool to get private benefits of control to finish the other aims. The adverse selection in the merger process makes it impossible to merger. Third, local government would help the local-stated companies to merger the other stated-companies and private companies to build bigger companies to compete with companies in the other areas. But in fact, the merger is harmful to all the private companies and leads to the decreasing profit. The final result of merger between companies in the same area is that in whole country, homgenous companies exist and concentrative degree is still low. To break it, on the one hand, we need more supervise to stop the local government getting private benefits of control; on the other hand, government should be limited to intervene the market.