Endogenous Mergers and Collusion in Asymmetric Market Structures

Abstract:     
Recent empirical evidence shows that cartels are often asymmetric, while cartel theory suggests that firm symmetry is conducive to collusion. Including an indivisible cost of cartelization, we show that medium asymmetric market structures are more conducive to collusion, since they balance the small firms' incentives to stay in the cartel against the need to cover the cartel leaders' indivisible cartelization cost. Using an endogenous merger model, we also show that forbidding mergers leading to symmetric market structures can induce mergers leading to asymmetric market structures with a higher risk of collusion. Current antisymmetry merger policy can thus be counterproductive.

Number of Pages in PDF File: 26

Accepted Paper Series