Edited by Klaus Gugler and B. Burcin Yurtoglu
Chapter 12: Endogenous Horizontal Mergers in Dynamic Markets
12. Endogenous horizontal mergers in dynamic markets Engelbert J. Dockner, Andrea Gaunersdorfer and Steﬀen Jørgensen 1 INTRODUCTION Traditionally, the consequences of mergers are studied in a static framework where a merger is modeled as an exogenous change of the number of ﬁrms in the industry. In terms of horizontal mergers, one of the ﬁrst papers studying the welfare consequences of an increase in market concentration was Salant, Switzer and Reynolds (1983) (SSR). They show that in a static Cournot game with linear demand and cost functions, mergers are unproﬁtable unless they involve at least 80 per cent of the ﬁrms in the industry. Following this somewhat counter-intuitive result, a series of papers have analyzed the proﬁtability of exogenous mergers and found that the SSR conclusion rests on two assumptions. First, Deneckere and Davidson (1985) show that if ﬁrms produce diﬀerentiated products and set prices instead of quantities, any price increase by the merging ﬁrms is matched by the outsiders and hence a merger becomes proﬁtable. Second, the conclusion of SSR is linked to the modeling of the cost structures. If the merging entity can exploit scale economies of the merging ﬁrms, cost reductions ensure the proﬁtability of mergers. Perry and Porter (1985) present a model that builds on these arguments: merging ﬁrms own a tangible asset, acquired from the merging partners, so that a merged ﬁrm can increase output at a given level of average costs and hence beneﬁt from the merger....
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