On the Relationship between Merger Profitability and the Degree of Competition

Abstract

We use the conjectural variations solution to analyze the profitability of horizontal mergers as a function of the degree of competition. We prove that any merger can be profitable if the environment is relatively competitive since in industries that are already cooperating, a merger loses attractiveness as an anti-competitive device. We also derive two welfare results: (i) mergers are socially beneficial if the competition is intense enough and (ii) any welfare enhancing merger is also profitable if the proportion of firms involved in the merger is relatively large. Finally, we obtain that the presence of free entry raises merger profitability only when the degree of competition is low enough.

Keywords: Collusion, conjectural variations, consumer surplus, Cournot oligopoly, free entry, homogeneous good, horizontal mergers, merger paradox, merger profitability, social welfare.