Endogenous Horizontal Mergers in Homogeneous Goods Industries with Bertrand Competition

We discuss the effect of horizontal mergers in homogeneous goods industries when firms compete à la Bertrand with increasing marginal costs of production. We set up a two-stage game where in the first stage firms decide whether to join the merger or to remain outside and in the second stage market competition takes place. We identify necessary and sufficient conditions for a market structure where a merger did occur to be coalition proof. We find that such market structure could be consumer surplus enhancing as it could arise even for lower post-merger prices with respect to the pre-merger scenario. This is in sharp contrast with the findings under both price and quantity competition where, absent efficiency gains, mergers unambiguously harm consumers.