Mergers, multiperiod Cournot competition, and Coasian dynamics

Under the simplifying conditions of product homogeneity, linear demand, symmetric and constant marginal costs, the static Cournot–Nash equilibrium predicts that exogenous horizontal mergers generate losses for the participants if the participants represent less than 80% of the firms in the industry. I successfully challenge the applicability of this well‐known merger paradox to markets for durable goods by introducing Coasian dynamics to the quantity competition, while maintaining all other simplifying conditions. I demonstrate that exogenous mergers with a relatively small number of insiders in industries with a relatively large initial number of firms can be profitable as long as the common discount factor is sufficiently high and the decision‐making horizon is sufficiently long. Unlike previous research on mergers in durable‐goods industries, the significance of the decision‐making horizon is emphasized; mergers that are unprofitable in a short‐horizon version of my model for all values of the discount factor can prove profitable in a long‐horizon version provided that agents are sufficiently patient.