Competition, cascades and connectivity: the effect of mergers on the global economy

Abstract

There is an increasing trend towards global financial consolidation. Empirical evidence has shown that though consolidation can increase market efficiency, it can also increase systemic risk. Therefore, understanding the effects of company mergers on the global economy is an increasingly pertinent issue. The research presented in this thesis aims to explore the effects that mergers can have on interconnected markets. It will also suggest potentially stabilising market conditions that can reduce the risks associated with competitive production.

An agent-based model of endogenous merger formation in a simulated market is developed. The dynamics of the model are investigated, and the conditions are identified under which market competition is sufficiently disrupted to prompt extended periods during which mergers are desirable. The model is used to demonstrate how merger waves can be created through industry shocks and firm overconfidence. This single-market model is then extended to one of multiple markets connected through supply chains. The conditions under which merger waves can spread along these pathways are found. The effect of introducing inter-market dependencies on market behaviour is also investigated.

Finally, the model is developed into a closed system in which agents react to changes in demand by varying their production quantities. Although this is found to increase the average market profitability, it has a significant effect on market behaviour.

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