When multiple merged entities lead in stackelberg oligopolies: merger paradox and welfare

Posted by Social Science Research Network

When multiple merged entities lead in stackelberg oligopolies: merger paradox and welfare

By Walter Ferrarese (University of Rome)

Abstract:     The merger paradox refers to the fact that in a symmetric static Cournot oligopoly horizontal mergers are generally unprofitable. Moreover, even in case of profitable mergers, remaining outside the merger is better than participating (free-riding issue). In this paper we tackle both issues in a model with linear inverse demand, in which we allow for multiple simultaneous mergers from a static symmetric Cournot market. Once the mergers occur, each merged entity acquires the right of becoming the leader over the remaining firms outside the mergers (outsiders). We allow the leaders to be heterogeneous in the number of members (insiders). Our model connects and extends Liu and Wang (2015), who are the first to explore the feature of the leadership acquisiton. They show that if a unique merged entity acquires the leadership, then there is always an incentive for such merger to occur. However, they do not tackle the free riding aspect of mergers. We obtain that the case of a unique leader is the only one in which the merged entity has always an incentive to form. We carry out a welfare analysis and show that, in our setting, despite the symmetry of firms total output can often rise and make consumers better off. Moreover, the adoption of consumers surplus only or consumer surplus plus industry profits as welfare measures does not change the set of welfare improving mergers. This suggests that the common view on horizontal mergers among symmetric firms being unambiguously welfare reducing requires, in some cases a deeper analysis, since the change in the market structure alone can be enough to increase welfare. It also suggests parsimony for the antitrust authorities in evaluating the welfare implications of mergers.

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