Merger Wars: Bidding for Complementary Assets

We examine the bidding competition for a set of complementary assets arising between two firms who also compete in a differentiated product market. The bidding contest takes the form of an acquisition battle for a third firm initially holding the assets. Depending on the nature of product competition between the bidding firms, either both bidding firms are made worse off by the availability of these assets or, paradoxically, the firm winning the bidding contest is less profitable than is the firm losing it. Our analysis is relevant to the many recent mergers in telecommunications, finance, and transportation, e.g., Viacom’s purchase of CBS.