The merger-paradox: A tournament-based solution

Cuihong Fan and Elmar Wolfstetter

Economics Letters, 2015, vol. 127, issue C, 35-38

Abstract: According to the well-known “merger paradox”, in a Cournot market game mergers are generally unprofitable unless most firms merge. The present paper proposes an optimal merger mechanism. With this mechanism mergers are never unprofitable, more profitable than in other known mechanisms, and in many cases welfare increasing. The proposed mechanism assumes that merged firms continue to operate as independent subsidiaries that are rewarded according to a simple and commonly observed relative performance measure.

Keywords: Mergers; Multi-divisional firms; Tournaments; Industrial organization (search for similar items in EconPapers)
JEL-codes: D4 L00 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:127:y:2015:i:c:p:35-38

DOI: 10.1016/j.econlet.2014.11.023

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