Oligopoly and the incentive for horizontal merger

Abstract

In order to talk about merger, one needs some
\nnotion of assets or capital which can be combined, and one
\nmust allow for asymmetry in the equilibrium to reflect such.
\nUsing a simple notion of capital with linear marginal cost
\nand linear demand, we show in two types of models when there
\nis and when there is not an incentive to merge. Merger
\nresults in an increase in the equilibrium price to the
\nbenefit of all firms. However, this price increase arises
\nprimarily because the output of the merged firm is lower
\nafter the merger than the combined output of its partners
\nprior to merger. We show how the profitability of merger
\ndepends upon both the structural and behavioral parameters
\nof the model.