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Entry and mergers in oligopoly with firm-specific network effects

Adriana Gama (), Rim Lahmandi-Ayed () and Ana Elisa Pereira ()
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Adriana Gama: El Colegio de México
Ana Elisa Pereira: Universidad de los Andes

Economic Theory, 2020, vol. 70, issue 4, No 9, 1139-1164

Abstract: Abstract This paper investigates the effects of exogenous entry on market performance, and the profitability and welfare effects of horizontal mergers in symmetric Cournot oligopolies with firm-specific network effects. With strategic substitutes in the Cournot part of the model, per-firm output is declining in the number of firms, but industry output, price, per-firm profit, consumer surplus and social welfare may go either way in response to entry. We identify respective sufficient conditions for each possibility. The counter-intuitive conclusions tend to require strong network effects. We study the scope for profitability of mergers and the associated welfare effects. In a general analysis, we provide a sufficient condition on inverse demand for a merger to be profitable, which amounts to requiring strong network effects. Under the condition that leads to higher industry output with entry, mergers are always social welfare-enhancing.

Keywords: Network effects; Network industries; Demand-side economies of scale; Incompatibility; Mergers (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 L14 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00199-020-01316-7

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