Profitability of horizontal mergers in the presence of price stickiness

This paper investigates the profitability of horizontal mergers with price dynamics through the differential game approach wherein both the open and closed-loop equilibria are considered. It is shown that the incentive to merge is determined by how fast the market price adapts to the equilibrium level. When prices adjust with a very sticky mechanism, mergers emerge with a small number of insiders, even if firms play open-loop strategies, and total output reduction after a merger is not significant, even in mergers with a large number of insiders. In the case of instantaneous price adjustment, it can be shown that the relationship between the possibility of a merger and market concentration depends on the type of strategy firms play. These findings have important implications for antitrust authorities since: (a) price stickiness creates market conditions that facilitate merger practice, and (b) changes in output may not be a good benchmark for merger assessment in the case of price stickiness.