Firms` Strategic Decisions Theoretical and Empirical Findings

Volume: 1

Indexed in: EBSCO.

This eBook presents recent case studies on firms and their strategy employed in specific scenarios and industries. Readers will find, in this volume, an analysis of oligopolistic industries done by ...
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On the Relationship between Merger Profitability and the Degree of Competition

Pp. 26-38 (13)

Marc Escrihuela-Villar

Abstract

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 low enough.

Keywords:

Collusion, conjectural variations, consumer surplus, Cournot oligopoly, free entry, homogeneous good, horizontal mergers, merger paradox, merger profitability, social welfare.

Affiliation:

Departamento de Economia Aplicada, Edificio Jovellanos Ctra. Valldemossa km.7.5, 07122 Palma de Mallorca (Islas Baleares), Spain.