Horizontal Mergers in a Differentiated Cournot Oligopoly

Hsu, Judy; Wang, X. Henry

doi:10.1111/j.1467-8586.2009.00329.x

Cited by 11 publications

(10 citation statements)

References 4 publications

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“…The non-spatial Bertrand model gives similar results that the more the merging products are differentiated, the higher the price and profit are (Deneckere and Davison 1985). The same results are observed in Hsu and Wang (2010) when a Cournot model is employed.…”

Section: Comparative Statics In Pre-merger Equilibriumsupporting

confidence: 80%

“…Specifically, Erkal and Piccinin (2010) find that entryinducing merger may be profitable even when cost synergies are not strong enough. 14 The two studies that are closest to the present chapter are Ebina and Shimizu (2009) and Hsu and Wang (2010). Both studies are based on a quantity-competition model with only four firms.…”

Section: Discussionmentioning

confidence: 93%

“…In this chapter, we investigate the effects of merger using a more general model than Ebina and Shimizu (2009) and Hsu and Wang (2010). In our model, N firms produce differentiated products, and the two merging firms (the insiders) have a different degree of substitutability between themselves than between each insider and other firms (the outsiders).…”

Section: Discussionmentioning

confidence: 99%

“…When firms 1 and 2 merge, they coordinate output levels to maximize their joint profits. The merged entity's optimization problem is: As in the pre-merger case, the negative relationship between the insiders' postmerger prices or profits and the degree of product substitution is also typically observed in the merger literature (Braid 1999, Deneckere and Davison 1985, Hsu and Wang 2010, Levy and Reitzes 1992, Salop 1979. 31 In our model this negative relationship between and the insiders' post-merger quantities, prices and profits is always true, except for the prices in a market where duopoly firms merge into a monopoly.…”

Section: Post-merger Equilibriummentioning

confidence: 92%

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Essays on Horizontal Merger Analysis

Li¹

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This dissertation consists of three essays that study the economic impact of horizontal mergers. Chapters 1 and 2 address the merger paradox about merger profitability. Briefly put, we examine two oligopoly models of both price and quantity competition and demonstrate that mergers are profitable under certain conditions. To be more specific, we analyze in Chapter 1 the effects of mergers when every firm in the market faces a capacity constraint. We show that a merger has no effect on equilibrium prices and profits if pure-strategy equilibrium prevails both before and after the merger.Otherwise prices increase and the merger is profitable. Specifically if mixed-strategy equilibrium prevails both before and after the merger, the support of the price distribution will shift upward, and the post-merger price distribution of each firm will dominate its pre-merger price distribution.We show in Chapter 2 that product differentiation can also resolve the merger paradox associated with quantity competition by broadening the range of parameters over which mergers are profitable. To be more specific, we demonstrate that a merger is profitable if the number of competitors is small, and if the substitutability is high between the insiders but low between each insider and the outsiders. The post-merger prices of the insiders are higher when the substitutability is higher between the insiders or lower between each insider and the outsiders.Chapter 3 extends the model in Chapter 2 to study how efficiencies affect postmerger equilibrium. Specifically, we consider a situation where a merger reduces the marginal cost of the merging firms. We find that, depending on the degree of substitutability between the merging products, efficiencies can have opposite effects on iii post-merger prices. When the degree of substitutability is sufficiently high, efficiencies tend to reduce post-merger prices, as the conventional wisdom suggests. However, if the degree of substitutability is lower, efficiencies have the unconventional effect of raising the post-merger prices. In this case, prices rise with efficiencies and might be eventually pushed up above the pre-merger level as efficiencies grow. Our analysis suggests that measures such as pass-through rate and the Upward Pricing Pressure test might lead to misleading conclusions regarding the price effects of a merger.My first, and deepest appreciation must go to my advisor Professor Zhiqi Chen. It has been three years since we first sat down and discussed the topics of this thesis. It is his every effort of guidance and advice that makes this thesis possible. My acknowledgement goes well beyond the academic help, and the most valuable financial and professional supports from him shall never be forgotten. I am in every sense indebted to Zhiqi.

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Section: Comparative Statics In Pre-merger Equilibriumsupporting

confidence: 80%

Section: Discussionmentioning

confidence: 93%

Section: Discussionmentioning

confidence: 99%

Section: Post-merger Equilibriummentioning

confidence: 92%

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Essays on Horizontal Merger Analysis

Li¹

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“…From prior studies we know that convex costs (Perry and Porter, 1985;Heywood and McGinty, 2008) as well as product differentiation (Lommerud and Sørgard, 1997;Hsu and Wang, 2010;Gelves, 2014) tend to increase firms' merger incentives. However, the current paper shows that, when the firms have the option to invest in a cost-reducing technology, a merger-to-monopoly is not a unique equilibrium outcome.…”

Section: (Iv) When the Investment Cost Is High Is The Spne Outcomementioning

confidence: 99%

Merger and Innovation Incentives in a Differentiated Industry

Kesavayuth

Lee

Zikos

2017

International Journal of the Economics of Business

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In this paper, we consider a duopoly with product differentiation and examine the interaction between merger and innovation incentives. The analysis reveals that a merger tends to discourage innovation, unless the investment cost is sufficiently low. This result holds whether or not side payments between firms are allowed. When side payments are permitted, a bilateral merger-to-monopoly is always profitable, a standard result in the literature. When side payments are not permitted, however, we show that a merger is not profitable when the efficiency of the new technology is relatively high and the investment cost is below a particular level.

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When to merge with a lower quality producer?

Sen

Sinha²

2022

J Econ

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Horizontal Mergers in a Differentiated Cournot Oligopoly

Cited by 11 publications

References 4 publications

Essays on Horizontal Merger Analysis

Essays on Horizontal Merger Analysis

Merger and Innovation Incentives in a Differentiated Industry

When to merge with a lower quality producer?

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