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Merger Incentives and Inverse Matrices from Bertrand Competition

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Author Info
Eric Howe
Jingang Zhao

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Abstract

This paper first inverts a general class of matrices for solving Bertrand equilibria from arbitrary coalition structures in linear Bertand oligopolies. It then studies merger incentives and obtains two main results; 1) for any asymmetric costs, mergers of any size are profitable; 2) a merger will reduce outsiders' profits when there are large cost savings or cost asymmetry. The second result is in sharp constrast to Cournot competition where mergers always increase outsiders' profits. This striking new feature not only supports the belief that Bertrand competition is more general than Cournot competition, but will also open up a new line of arguments in future attempts to block merger proposals

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Publisher Info
Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 586.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:586

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Related research
Keywords: Bertrand Equilibrium; Coalition Structure; Inverse Matrix; Merger Incentives;

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
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  1. Salant, Stephen W & Switzer, Sheldon & Reynolds, Robert J, 1983. "Losses from Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 185-99, May. [Downloadable!] (restricted)
  2. Zhao, Jingang, 1992. "The hybrid solutions of an N-person game," Games and Economic Behavior, Elsevier, vol. 4(1), pages 145-160, January. [Downloadable!] (restricted)
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  3. Beth Allen, 2000. "The Future of Microeconomic Theory," Journal of Economic Perspectives, American Economic Association, vol. 14(1), pages 143-150, Winter. [Downloadable!] (restricted)
  4. Zhao, Jingang, 1991. "The Equilibria of a Multiple Object Game," International Journal of Game Theory, Springer, vol. 20(2), pages 171-82.
  5. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier. [Downloadable!] (restricted)
  6. Fevrier, Philippe & Linnemer, Laurent, 2004. "Idiosyncratic shocks in an asymmetric Cournot oligopoly," International Journal of Industrial Organization, Elsevier, vol. 22(6), pages 835-848, June. [Downloadable!] (restricted)
  7. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-26, March. [Downloadable!] (restricted)
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  8. Amir, Rabah & Jin, Jim Y., 2001. "Cournot and Bertrand equilibria compared: substitutability, complementarity and concavity," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 303-317, March. [Downloadable!] (restricted)
  9. Raymond Deneckere & Carl Davidson, 1985. "Incentives to Form Coalitions with Bertrand Competition," RAND Journal of Economics, The RAND Corporation, vol. 16(4), pages 473-486, Winter. [Downloadable!] (restricted)
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