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Differentiation and Cost Asymmetry: Solving the Merger Paradox

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  • J. Alejandro Gelves

Abstract

This paper investigates the impact of product differentiation and of cost asymmetry on the merger paradox using a Cournot framework. It finds that when all firms share the same costs, two-firm mergers in an n firm market generate at least no profit loss when goods are sufficiently differentiated. This result contrasts with that of Salant, Switzer, and Reynolds (1983) where mergers of strategic substitutes are rarely profitable, and Deneckere and Davidson (1985) where competition among strategic complements yields profitable mergers. Critically, when costs are asymmetric, a merger between an efficient and inefficient firm, with differentiated products, can be more profitable to participants than to excluded rivals. Following this merger, welfare is shown to increase given that the cost asymmetry between insiders is large enough.

Suggested Citation

  • J. Alejandro Gelves, 2014. "Differentiation and Cost Asymmetry: Solving the Merger Paradox," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 21(3), pages 321-340, November.
    • Handle: RePEc:taf:ijecbs:v:21:y:2014:i:3:p:321-340
    DOI: 10.1080/13571516.2014.959258
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    Cited by:

    1. Chengyong Yu & Rui Cheng & Cheng Zhang & Huijuan Wang, 2021. "Economic Development, Institutional Quality, and the Scale Effect Puzzle of Cross-Border M&As: Evidence from a Meta-Analysis Model," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(9), pages 2514-2541, July.
    2. Gamal Atallah, 2015. "Multi-Firm Mergers with Leaders and Followers," Working Papers E1501E, University of Ottawa, Department of Economics.
    3. Garcia, Arturo & Leal, Mariel & Lee, Sang-Ho & Park, Chul-Hi, 2024. "Merger incentive and strategic corporate social responsibility by a multiproduct corporation," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 193-206.
    4. Neelanjan Sen & Drishti Narula, 2022. "Merger under horizontal and vertical product differentiation," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 509-531, December.
    5. repec:lic:licosd:43022 is not listed on IDEAS
    6. Tsuyoshi Toshimitsu & Tetsuya Nakajima, 2021. "On the “merger paradox” in price competition with asymmetric product differentiation," Australian Economic Papers, Wiley Blackwell, vol. 60(1), pages 153-162, March.
    7. Manel Antelo & David Peón, 2019. "On Cooperation Through Alliances and Mergers," Journal of Industry, Competition and Trade, Springer, vol. 19(2), pages 263-279, June.
    8. Ana Espínola-Arredondo & Felix Munoz-Garcia & Ae Rin Jung, 2020. "Organic Mergers and Acquisitions," Journal of Industry, Competition and Trade, Springer, vol. 20(1), pages 59-91, March.
    9. Gelves, J. Alejandro & Heywood, John S., 2016. "Pre-emptive mergers and downstream cost asymmetry," Economics Letters, Elsevier, vol. 147(C), pages 23-26.
    10. Luis Gautier & Mahelet G. Fikru, 2024. "Welfare Impact of New Firm Acquisition," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 105-132, Springer.
    11. Luis Gautier & Mahelet G. Fikru, 2024. "The Design of Emission Taxes in Markets with New Firm Acquisitions," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 225-243, Springer.
    12. Choi, Pak-Sing & Espinola-Arredondo, Ana & Munoz, Felix, 2020. "Mergers as an environmental ally: Socially excessive and insufficient merger approvals," Working Papers 2020-1, School of Economic Sciences, Washington State University.
    13. Luis Gautier & Mahelet G. Fikru, 2024. "Mergers in Cournot Markets with Environmental Externality and Product Differentiation," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 21-46, Springer.
    14. Choi, Pak-Sing & Espínola-Arredondo, Ana & Muñoz-García, Félix, 2022. "Environmental policy helping antitrust decisions: Socially excessive and insufficient merger approvals," Resource and Energy Economics, Elsevier, vol. 67(C).
    15. Dusanee Kesavayuth & Sang-Ho Lee & Vasileios Zikos, 2018. "Merger and Innovation Incentives in a Differentiated Industry," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 25(2), pages 207-221, May.
    16. Tsuyoshi Toshimitsu & Tetsuya Nakajima, 2018. "On the merger paradox and asymmetric product differentiation," Discussion Paper Series 173, School of Economics, Kwansei Gakuin University, revised Feb 2018.

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