IO6 Horizonal Mergers

• Example - 3 indentical firms, MC=30, P=150-Q. 
• Firms act as cournot competitors. No merger
• Each firm produces q=30, p=60, profit=(60-30)30 = 900
• Merger: two firms merge and compete cournot with the other firm.
• Each firm produces q=40, p=70, profit =(70-30)40 = 1600

Impacts:

Three ways:

• Cost Synergies
• Stackelberg margers: the merged firms act like market leaders
• Bertrand competition with differentaited goods.

• Cases reducing fixed costs and variable costs still don't fix the marger paradox. 
• Merger is likely to be profitable for the merged firm when fixed costs are high and the merger gives significant cost savings. 
• The non merged firm always gains more than the merged firm
• Consumer is still worse off.

• Stage 1: each leader firm chooses its output ql
• Stage 2: each follower firm chooses its output qf in response to the aggregate output of the leader firms.
• As the standard stackelberg model we can show that
  • leader firms correctly antcipate Qf
  • each leader has greater output than each follower
  • the leaders are more profitable than the non-merged followers
  • Merger to join the leader group had an advantage

• A street is served by 5 firms evenly located along.
• Each consumers costs are the price and the transport costs.
• Consider a merger between some of these firms
• A merger of neighboring firms changed the equilibrium
• Profitbale for the merged firms
• Unmerged firms also enjoy greater profits
• Consumers lose out