Oligopoly and the incentive for horizontal merger

Abstract

In order to talk about merger, one needs some notion of assets or capital which can be combined, and one must allow for asymmetry in the equilibrium to reflect such. Using a simple notion of capital with linear marginal cost and linear demand, we show in two types of models when there is and when there is not an incentive to merge. Merger results in an increase in the equilibrium price to the benefit of all firms. However, this price increase arises primarily because the output of the merged firm is lower after the merger than the combined output of its partners prior to merger. We show how the profitability of merger depends upon both the structural and behavioral parameters of the model.

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