Profits in horizontal mergers: an asymmetric equilibrium approach to solve the Merger Paradox

Abstract

In a seminal work published by Salant et al. in 1983, they showed that under a Cournot oligopoly competition, the horizontal mergers are pro table only when more than 80% of the rms in the market participates in the merge (Salant et al., 1983). Moreover, the non-merged rms could increase their pro ts. These counterintuitive results are known as the \Merger Paradox". Many works have reported di erences concerning what was theoretically expected, relaxing some assumptions in the original model. In this paper, we propose a new approach to study horizontal mergers. In contrast to Salant et al.'s, we analyze the Cournot oligopoly resulting after the merge as an asymmetric equilibrium. We compare our approach to the one proposed by Salant et al.'s, and a simplistic numeric example for twelve producers is analyzed. Our results support some conclusions obtained by other works that refute the model proposed by Salant et al.'s, but in contrast to them, we preserve the main assumptions of the original model. In particular, our results show that horizontal mergers are pro table for all the rms, merged and non-merged. Moreover, we show that the Merger Paradox arises when it is assumed a symmetric equilibrium after the merge as it is proposed by Salant et al. (1983).