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Profitability of horizontal mergers in the presence of price stickiness

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  • Esfahani, Hamideh

Abstract

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.

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  • Esfahani, Hamideh, 2019. "Profitability of horizontal mergers in the presence of price stickiness," European Journal of Operational Research, Elsevier, vol. 279(3), pages 941-950.
  • Handle: RePEc:eee:ejores:v:279:y:2019:i:3:p:941-950
    DOI: 10.1016/j.ejor.2019.06.038
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