Horizontal Mergers in a Dynamic Cournot Market: Solving the Free Riding Issue Without Efficiency Gains

Marc Escrihuela-Villar () and Ferrarese Walter ()
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Ferrarese Walter: Department of Economics and Finance, Università degli Studi di Roma Tor Vergata, Via Columbia 2, 00133Roma, Italy

The B.E. Journal of Economic Analysis & Policy, 2019, vol. 19, issue 4, 14

Abstract: We discuss horizontal mergers in a linear, homogeneous, symmetric Cournot market where the new entity repeatedly competes with outside firms over an indefinite horizon and efficiency gains are ruled out. If the degree of collusion among the outside firms is large enough, then, despite the large payoff of each outsider, we obtain output configurations solving both the profitability and the free riding issues. Such a result requires that mergers involve a sufficiently small number of firms, which is in sharp contrast with the findings in the literature and rationalize the empirical fact that relatively small mergers, even in absence of synergies, do actually occur and that, although outside firms may benefit from the merger of their rivals, insiders end up being better off. Finally, we show that merging can often be a more advantageous alternative than a fully collusive agreement, in which, moreover, the free riding component is not solved.

Keywords: horizontal mergers; repeated interaction; free riding issue (search for similar items in EconPapers)
JEL-codes: C73 L11 L13 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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DOI: 10.1515/bejeap-2018-0321

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