Endogenous Mergers and Leadership Acquisition in Cournot Oligopolies

43 Pages Posted: 10 Feb 2017 Last revised: 7 Dec 2017

Date Written: February 10, 2017

Abstract

I set up an endogenous merger model in which, whenever fi rms 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 pro table irrespective of the number of participants, only two endogenous equilibria are possible: either a bilateral coalition or an n - 1-fi rm coalition. I then allow for multiple coalitions and show that merger waves often occur as a fi rms' response to the exclusion of monopolization. In other cases, even if monopolization is allowed, the grand coalition does not form and at least one fi rm 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 justi fication 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 fi rms generating no synergies can be bene ficial to both consumers and producers.

Keywords: endogenous mergers, leadership acquisition, welfare

JEL Classification: L11, L13, L41

Suggested Citation

Ferrarese, Walter, Endogenous Mergers and Leadership Acquisition in Cournot Oligopolies (February 10, 2017). CEIS Working Paper No. 398, Available at SSRN: https://ssrn.com/abstract=2915083 or http://dx.doi.org/10.2139/ssrn.2915083

Walter Ferrarese (Contact Author)

Universitat de Les Illes Balears ( email )

Carretera de Valdemossa km 7.5
Palma de Mallorca, Palma de Mallorca
Spain

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