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Leading and Merging: Convex Costs, Stackelberg, and the Merger Paradox

Listed author(s):
  • John S. Heywood


    (Department of Economics, University of Wisconsin-Milwaukee, P.O. Box 413, Milwaukee, WI 53201, USA)

  • Matthew McGinty


    (Department of Economics, University of Wisconsin-Milwaukee, P.O. Box 413, Milwaukee, WI 53201, USA)

This paper examines the consequences of a Stackelberg leader merging with followers when costs are convex. Such mergers are always profitable for the participants, and the followers often do better merging than remaining excluded rivals. This resolution of the merger paradox cannot be generated either by Stackelberg leadership without convex costs or by convex costs without leadership. In addition, with convex costs, a merger with the leader can actually harm excluded rivals (suggesting why they might object to the merger) and increase social welfare.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 74 (2008)
Issue (Month): 3 (January)
Pages: 879-893

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Handle: RePEc:sej:ancoec:v:74:3:y:2008:p:879-893
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