Topics in Corporate Law and Competition Law


One of the key insights of the Coase Theorem is that the inefficiencies and difficulties that are associated with uncompensated positive and negative external effects can be mitigated if parties are permitted to bargain. For firms, one extreme form of bargaining is to permanently internalise externalities by merging. This can happen through formal merger negotiations or via takeover bids. This chapter examines some of the economic issues that arise within firms in response to different legal rules, and when firms seek to internalise externalities by merging. The Chapter also studies a wide variety of economic issues that arise in corporate law and governance, and competition law.

Section 10.2 examines the effect of different legal rules on the incentives to merge. Section 10.3 studies the effect of various kinds of liability rules on managerial compensation arrangements. Sections 10.4 and 10.5 deal with takeovers and the dilution of shareholder rights, as well as corporate governance and the measurement of voting power when shareholders in a public company possess voting rights. Section 10.6 turns to competition law and examines the usefulness of standard measures of market concentration in assessing the desirability of merger activity. Section 10.7 uses the lessons from Chapter 9 to study the design of legal rules to deter collusive price-fixing behaviour between firms.

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