On the profitability of horizontal mergers in industries with dynamic competition

The consequences of horizontal mergers on firms' profits are traditionally studied within a static Cournot framework. In such a setting, the merger is modeled as an exogenous change in market structure. One of the key results in this literature is that if firms compete in a homogeneous product market, mergers will in general be unprofitable to the merging firms. In this paper, we analyze horizontal mergers of firms that compete in a dynamic Cournot market. We find unlike in static Cournot models that mergers are always profitable independent of the number of merging firms. While firms have an incentive to merge, welfare in the economy, however, does not increase since the gain in producer surplus does not offset the loss in consumer surplus due to increased prices. (C) 2001 Elsevier Science B.V. All rights reserved.