Merger Waves Through Market Leadership

Abstract

I present a merger model where a merged entity is assumed to acquire the market leadership from a linear, symmetric, simultaneous, homogeneous good, quantity-setting oligopoly and where efficiency gains are ruled out. If firms cannot merge to monopoly, mergers occur in waves, and for each number of pre-merger firms, I endogenize: (i) the number of mergers in a wave; (ii) the number of firms involved in each merger; and (iii) the order in which the mergers take place. If monopolization is allowed, in the majority of cases, all firms prefer to merge into a single entity. This suggests the strategic nature of merger waves as a response to the prohibition of monopolization. Finally, in sharp contrast with the existing results on horizontal mergers under simultaneous quantity competition without efficiency gains, and in line with empirical findings, profitability is ensured even if mergers involve a small number of firms.