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Differentiation and Cost Asymmetry: Solving the Merger Paradox

Differentiation and Cost Asymmetry: Solving the Merger Paradox AbstractThis paper investigates the impact of product differentiation and of cost asymmetry on the merger paradox using a Cournot framework. It finds that when all firms share the same costs, two-firm mergers in an n firm market generate at least no profit loss when goods are sufficiently differentiated. This result contrasts with that of Salant, Switzer, and Reynolds (1983) where mergers of strategic substitutes are rarely profitable, and Deneckere and Davidson (1985) where competition among strategic complements yields profitable mergers. Critically, when costs are asymmetric, a merger between an efficient and inefficient firm, with differentiated products, can be more profitable to participants than to excluded rivals. Following this merger, welfare is shown to increase given that the cost asymmetry between insiders is large enough. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of the Economics of Business Taylor & Francis

Differentiation and Cost Asymmetry: Solving the Merger Paradox

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References (25)

Publisher
Taylor & Francis
Copyright
© 2014 International Journal of the Economics of Business
ISSN
1466-1829
eISSN
1357-1516
DOI
10.1080/13571516.2014.959258
Publisher site
See Article on Publisher Site

Abstract

AbstractThis paper investigates the impact of product differentiation and of cost asymmetry on the merger paradox using a Cournot framework. It finds that when all firms share the same costs, two-firm mergers in an n firm market generate at least no profit loss when goods are sufficiently differentiated. This result contrasts with that of Salant, Switzer, and Reynolds (1983) where mergers of strategic substitutes are rarely profitable, and Deneckere and Davidson (1985) where competition among strategic complements yields profitable mergers. Critically, when costs are asymmetric, a merger between an efficient and inefficient firm, with differentiated products, can be more profitable to participants than to excluded rivals. Following this merger, welfare is shown to increase given that the cost asymmetry between insiders is large enough.

Journal

International Journal of the Economics of BusinessTaylor & Francis

Published: Sep 2, 2014

Keywords: Merger; Free Rider; Product Differentiation; Price Effect; Incentive to Merge.; L13; L40; L41.

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