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Capital Accumulation and Horizontal Mergers in Differential Oligopoly Games

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  • R. Cellini
  • L. Lambertini

Abstract

The existing (static) literature stresses the relevance of capital inputs in determining whether any given merger is (i) profitable and (ii) socially efficient, or not. We take a differential game approach to the same issue, proposing two different models based, respectively, on the capital accumulation dynamics introduced by Ramsey and Solow, respectively. We show that the change in the steady state size of productive plants induced by a merger may play a decisive role in determining whether such a merger is profitable, or socially efficient. However, unlike the static contributions in the same vein, we show that the parameter sets where, respectively, firms find it convenient to merge, and the merger is welfare-increasing, do not intersect at all, irrespectively of the capital accumulation dynamics being considered. This entails that a regulator concerned with the welfare performance of an industry should prevent firms from carrying out any horizontal merger.

Suggested Citation

  • R. Cellini & L. Lambertini, 2003. "Capital Accumulation and Horizontal Mergers in Differential Oligopoly Games," Working Papers 477, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:477
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    References listed on IDEAS

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    1. Farrell, Joseph & Shapiro, Carl, 1988. "Horizontal Mergers: An Equilibrium Analysis," Department of Economics, Working Paper Series qt0tp305nx, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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    Cited by:

    1. Cellini, Roberto & Brekke, Kurt Richard & Siciliani, Luigi, 2008. "Competition and quality in regulated markets with sluggish demand," CEPR Discussion Papers 6938, C.E.P.R. Discussion Papers.
    2. Kurt R. Brekke & Roberto Cellini & Luigi Siciliani & Odd Rune Straume, 2008. "Competition and quality in regulated markets: a differential-game approach," NIPE Working Papers 08/2008, NIPE - Universidade do Minho.
    3. Lambertini, Luca & Mantovani, Andrea, 2006. "Identifying reaction functions in differential oligopoly games," Mathematical Social Sciences, Elsevier, vol. 52(3), pages 252-271, December.

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