Horizontal Mergers with Free Entry

Abstract

We consider the impact of horizontal mergers in the presence of free entry and exit. In contrast to much of the previous literature on horizontal mergers, our model yields predictions that seem intuitively reasonable: with only moderate cost synergies mergers of a small number of industry participants are beneficial (even under quantity competition), there is no "free rider problem" in that insiders always benefit more than outsiders, and quantity-setting and price-setting games yield similar predictions. We also find that all privately beneficial mergers are also socially beneficial.

Keywords: Horizontal mergers, free entry

JEL Classification: L13, L22