CONVEX COSTS AND THE MERGER PARADOX REVISITED

John Heywood and Matthew McGinty

Economic Inquiry, 2007, vol. 45, issue 2, 342-349

Abstract: Returning to the contention that convex costs provide a resolution to the merger paradox, we show that for reasonable degrees of convexity, the minimum market share needed for merger to be profitable remains close to that associated with linear costs. Moreover, convex costs do not eliminate the free rider problem identified as part of the merger paradox. Finally, we retain convex costs while modeling a firm‐by‐firm sequential merger process, showing that the paradox constrains a larger share of potential mergers. These findings help reduce the relevance of convex costs as a resolution to the merger paradox. (JEL L12, L13)

Date: 2007
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