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The closed-loop effect and the profitability of horizontal mergers

Hassan Benchekroun ()

Canadian Journal of Economics, 2003, vol. 36, issue 3, 546-565

Abstract: We study the profitability of horizontal mergers in a dynamic competition context with sticky prices. It is shown that, when firms use open-loop strategies, a merger is profitable only if the share of the market that merges is significant enough. In the case where firms use closed-loop strategies we provide a method to conduct analytically the study of the profitability of horizontal mergers. We first prove the existence of an equilibrium of the game when a subset of firms merges. When firms use feedback strategies, mergers are profitable even when the share of the market that merges is arbitrarily small.

JEL-codes: D4 L13 (search for similar items in EconPapers)
Date: 2003
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Handle: RePEc:cje:issued:v:36:y:2003:i:3:p:546-565