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Horizontal Merger With An Inefficient Leader

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  • JUAN ALEJANDRO GELVES

Abstract

In this paper we analyze two-firm horizontal mergers between an inefficient leader and an efficient follower. The merger is profitable and may decrease price (increase welfare) if the market size is large enough. Furthermore, a merger involving a leader which decreases price hurts outsider firms and therefore resolves the free-rider component of the merger paradox. Finally, it is shown that, when the market is large, these mergers always increase welfare regardless of the size of the cost asymmetry between leader and follower. Copyright © 2010 The Author. Journal compilation © 2010 Blackwell Publishing Ltd and The University of Manchester.

Suggested Citation

  • Juan Alejandro Gelves, 2010. "Horizontal Merger With An Inefficient Leader," Manchester School, University of Manchester, vol. 78(5), pages 379-394, September.
  • Handle: RePEc:bla:manchs:v:78:y:2010:i:5:p:379-394
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    References listed on IDEAS

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    1. Ziss, Steffen, 2001. "Horizontal mergers and delegation," International Journal of Industrial Organization, Elsevier, vol. 19(3-4), pages 471-492, March.
    2. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    3. Levin, Dan, 1990. "Horizontal Mergers: The 50-Percent Benchmark," American Economic Review, American Economic Association, vol. 80(5), pages 1238-1245, December.
    4. Stephen W. Salant & Sheldon Switzer & Robert J. Reynolds, 1983. "Losses From Horizontal Merger: The Effects of an Exogenous Change in Industry Structure on Cournot-Nash Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 185-199.
    5. Schmalensee, Richard, 1987. "Horizontal Merger Policy: Problems and Changes," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 41-54, Fall.
    6. White, Lawrence J, 1987. "Antitrust and Merger Policy: A Review and Critique," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 13-22, Fall.
    7. John S. Heywood & Matthew McGinty, 2008. "Leading and Merging: Convex Costs, Stackelberg, and the Merger Paradox," Southern Economic Journal, Southern Economic Association, vol. 74(3), pages 879-893, January.
    8. Fisher, Franklin M, 1987. "Horizontal Mergers: Triage and Treatment," Journal of Economic Perspectives, American Economic Association, vol. 1(2), pages 23-40, Fall.
    9. Huck, Steffen & Konrad, Kai A. & Muller, Wieland, 2001. "Big fish eat small fish: on merger in Stackelberg markets," Economics Letters, Elsevier, vol. 73(2), pages 213-217, November.
    10. 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.
    11. Hay, George A & Werden, Gregory J, 1993. "Horizontal Mergers: Law, Policy, and Economics," American Economic Review, American Economic Association, vol. 83(2), pages 173-177, May.
    12. Cillian Ryan, 2006. "Technology Transfer and Merger Activities with Trade and Tariffs," Review of International Economics, Wiley Blackwell, vol. 14(4), pages 582-599, September.
    13. 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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    Cited by:

    1. Gamal Atallah, 2015. "Multi-Firm Mergers with Leaders and Followers," Working Papers E1501E, University of Ottawa, Department of Economics.
    2. Gelves, J. Alejandro & Heywood, John S., 2013. "Privatizing by merger: The case of an inefficient public leader," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 69-79.

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