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Endogenous Mergers and Leadership Acquisition in Cournot Oligopolies

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Abstract

I set up an endogenous merger model in which, whenever firms agree to join in a coalition, the new entity acquires the leadership in a symmetric Cournot oligopoly. I first explore the case of a single merger and show that, despite being such merger profitable irrespective of the number of participants, only two endogenous equilibria are possible: either a bilateral coalition or an n - 1-firm coalition. I then allow for multiple coalitions and show that merger waves often occur as a firms' response to the exclusion of monopolization. In other cases, even if monopolization is allowed, the grand coalition does not form and at least one firm prefers to act as a follower. The model provides an explanation of why bilateral mergers are observed in almost every industry, even where synergies are unlikely and why it is possible to observe a single large entity behaving as a market leader. Furthermore, it provides a justification of the strategic nature of merger waves as a response to the exclusion of monopolization. I also check how my results vary with different ex-ante merger policies. Moreover, it is shown that bilateral mergers between identical firms generating no synergies can be beneficial to both consumers and producers.

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  • Walter Ferrarese, 2017. "Endogenous Mergers and Leadership Acquisition in Cournot Oligopolies," CEIS Research Paper 398, Tor Vergata University, CEIS, revised 06 Dec 2017.
  • Handle: RePEc:rtv:ceisrp:398
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    1. 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, President and Fellows of Harvard College, vol. 98(2), pages 185-199.
    2. Marc Escrihuela-Villar & Ramon Faulí-Oller, 2008. "Mergers in asymmetric Stackelberg markets," Spanish Economic Review, Springer;Spanish Economic Association, vol. 10(4), pages 279-288, December.
    3. Gamal Atallah, 2015. "Multi-Firm Mergers with Leaders and Followers," Working Papers E1501E, University of Ottawa, Department of Economics.
    4. Nick Feltovich, 2001. "Mergers, welfare, and concentration: Results from a model of stackelberg-cournot oligopoly," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 29(4), pages 378-392, December.
    5. Mariana Cunha & Hélder Vasconcelos, 2015. "Mergers in Stackelberg Markets with Efficiency Gains," Journal of Industry, Competition and Trade, Springer, vol. 15(2), pages 105-134, June.
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    More about this item

    Keywords

    horizontal mergers; leadership acquisition; welfare;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • 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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