On the Relationship between Merger Profitability and the Degree of Competition
Pp. 26-38 (13)
We use the conjectural variations solution to analyze the profitability of
horizontal mergers as a function of the degree of competition. We prove that any
merger can be profitable if the environment is relatively competitive since in industries
that are already cooperating, a merger loses attractiveness as an anti-competitive device.
We also derive two welfare results: (i) mergers are socially beneficial if the competition
is intense enough and (ii) any welfare enhancing merger is also profitable if the
proportion of firms involved in the merger is relatively large. Finally, we obtain that the
presence of free entry raises merger profitability only when the degree of competition is
Collusion, conjectural variations, consumer surplus, Cournot
oligopoly, free entry, homogeneous good, horizontal mergers, merger paradox,
merger profitability, social welfare.
Departamento de Economia Aplicada, Edificio Jovellanos Ctra. Valldemossa km.7.5, 07122 Palma de Mallorca (Islas Baleares), Spain.