On Mergers in a Stackelberg Market with Asymmetric Convex Costs

Abstract

This paper analyzes profitability, the incentives to free ride and the price effects of horizontal mergers in a Stackelberg market with an efficient leader and a group of inefficient followers when costs are convex. It is shown that a leader-follower merger is always profitable even though the free-riding incentives may reappear in situations where it would be absent with symmetric convex costs. On the contrary, a merger of two followers is only profitable if they are inefficient enough since in this case the free-riding behavior of the non-merging followers is more than compensated by the efficient reallocation of outputs derived from the merger. Finally, we also show that the mergers considered generally increase price except when the leader and a moderately inefficient follower merge.