Cost-saving or Cost-enhancing Mergers: the Impact of the Distribution of Roles in Oligopoly

We consider firms perfectly symmetrical on production costs in the pre-merger game but the cost of the merged entity may be amended due to the anti-competitive effects of the merger. The lack of empirical precision concerning the effect of the merger on production costs (Scherer, 1980 or Tichy, 2002) justifies our theoretical model in which we do not specify a priori the exact production cost in the post merger game. Two firms in Stackelberg oligopoly game take part in the merger. The aim of this paper is to identify under which conditions on the cost the merger is privately profitable and socially desirable when firms in the coalition are either leaders or followers. We show that a merger could remain profitable even if the merged entity suffers from efficiency losses and we identify the condition on efficiency gains below which the merger takes place with the exclusion of all rivals. Among all possible cases, a profitable merger between two firms of different roles (leader & follower) could potentially give rise to more efficiency losses than the one encompassing firms of the same role. Moreover, profitable mergers can induce either an increase or a decrease in social welfare except for the case where two leaders decide to merge. Consequently this paper argues that Competition Authorities must supervise more closely two-firm mergers including either one or two followers.