Edited by Manfred Neumann and Jürgen Weigand
Chapter 2: Efficiency versus Market Power through Mergers
67 where Si is ﬁrm i’s sales, mi is its market share, η is the industry elasticity of demand, and σ is the degree of product differentiation (0≤σ≤1) (Mueller, 1986, pp. 54–6). A degree of cooperation, θ, equal to 1 leads to the perfect collusion outcome, θ = 0 is the Cournot outcome and a negative θ such that the term in parentheses in (2.2) is zero produces the Bertrand equilibrium, price equal to marginal costs (assumed here to equal average costs). If we assume that two merging ﬁrms could always choose the same price and quantity combinations after a merger as before, a horizontal merger between ﬁrms i and j leads to the following objective function for the post-merger company i (ibid., p. 189) Oi = π i + π j + θ ∑ π k . k ≠i , j n (2.3) The horizontal merger effectively leads to perfect collusion between the two merging ﬁrms. As long as there was not perfect collusion among all ﬁrms in the industry before the merger, or Bertrand competition afterwards, the merger must lead to a higher price and reduced output after the merger. Thus, all horizontal mergers should be accompanied by some manifestations of a market power increase.1 Horizontal mergers can also lead to an effective increase in market power and higher prices if the reduction of the number of sellers increases the degree of cooperation, θ, for at least some ﬁrms in the industry. Vertical mergers The only anti-competitive effects of vertical mergers that have not by now been totally discredited are that...
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