Mergin Firms' Strategies and the Merger Paradox

Abstract

Taking a model of horizontal mergers as a reference, the purpose of this paper is to qualify the merger paradox by proving that a multidivisional firm formed by a merger could be sustainable even though the merger does not involve most of the firms in the market. Specifically, it is proved that the minimum number of merging firms to have a profitable merger, assuming both simultaneous and sequential games, is lower in our model than in the traditional literature. Furthermore, it is proved that, if the multidivisional firm sets the number of divisions optimally, the merger is sustainable and less harmful to welfare than in the traditional model.