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Resolving The Merger Paradox

Author

Listed:
  • Sanja Milenković

Abstract

Horizontal mergers in a Cournot market are generally unprofitable for the merged entities and create a free-riding problem unless they involve more than 80% of market participants. This phenomenon is known as the merger paradox. This paper aims to explain the concept of the paradox and reasons for its emergence by modifying one assumption in the Cournot model while keeping the other assumptions constant in order to identify the primary contributor. The results suggest that the merger paradox can be partially addressed by modifying key assumptions of the Salant, Switzer and Reynolds (1983) model; however, the practical sustainability of these modifications remains uncertain.

Suggested Citation

  • Sanja Milenković, 2025. "Resolving The Merger Paradox," Ekonomske ideje i praksa, Faculty of Economics and Business, University of Belgrade, issue 59, pages 37-56, November.
    • Handle: RePEc:beo:ekidpr:y:2025:i:59:p:37-56
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    File URL: https://www.ekof.bg.ac.rs/journals/eip/59/410.pdf
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    References listed on IDEAS

    as
    1. Perry, Martin K & Porter, Robert H, 1985. "Oligopoly and the Incentive for Horizontal Merger," American Economic Review, American Economic Association, vol. 75(1), pages 219-227, March.
    2. 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.
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    Keywords

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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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