TY - GEN
T1 - How Bad is the Merger Paradox?
AU - Blumrosen, Liad
AU - Mizrahi, Yehonatan
N1 - Publisher Copyright: © 2022, The Author(s), under exclusive license to Springer Nature Switzerland AG.
PY - 2022
Y1 - 2022
N2 - The merger paradox is a classic, counter-intuitive result from the literature of Industrial Organization saying that merging firms typically experience a decline in their overall profit compared to their total pre-merger profit. This phenomenon is more striking in small oligopolistic markets, where mergers increase market concentration and may hence trigger a substantial increase in prices. In this paper, we investigate the severity of the merger paradox in Cournot oligopoly markets. Namely, we study the worst-case magnitude of this profit loss in quantity-setting market games. We consider convex, asymmetric production costs for the firms, and we show that the profit loss can be substantial even in small markets. That is, two merging firms can lose half of their pre-merger profit, but no more than half in markets with concave demand functions. On the positive side, we show that in markets with affine demand two firms can never lose more than 1/9 of their profit when merging, and this bound is tight. We also study the asymptotic loss in larger markets, where it is easy to show that the profit loss can be arbitrarily large when multiple firms merge; we give bounds that characterize the profit loss from a merger as a function of the market size and the number of merging firms.
AB - The merger paradox is a classic, counter-intuitive result from the literature of Industrial Organization saying that merging firms typically experience a decline in their overall profit compared to their total pre-merger profit. This phenomenon is more striking in small oligopolistic markets, where mergers increase market concentration and may hence trigger a substantial increase in prices. In this paper, we investigate the severity of the merger paradox in Cournot oligopoly markets. Namely, we study the worst-case magnitude of this profit loss in quantity-setting market games. We consider convex, asymmetric production costs for the firms, and we show that the profit loss can be substantial even in small markets. That is, two merging firms can lose half of their pre-merger profit, but no more than half in markets with concave demand functions. On the positive side, we show that in markets with affine demand two firms can never lose more than 1/9 of their profit when merging, and this bound is tight. We also study the asymptotic loss in larger markets, where it is easy to show that the profit loss can be arbitrarily large when multiple firms merge; we give bounds that characterize the profit loss from a merger as a function of the market size and the number of merging firms.
KW - Approximation
KW - Cournot Oligopoly
KW - Industrial Organization
KW - Market Structure
KW - Mergers and Acquisitions
KW - Nash Equilibrium
UR - http://www.scopus.com/inward/record.url?scp=85138832344&partnerID=8YFLogxK
U2 - https://doi.org/10.1007/978-3-031-15714-1_2
DO - https://doi.org/10.1007/978-3-031-15714-1_2
M3 - منشور من مؤتمر
SN - 9783031157134
T3 - Lecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics)
SP - 23
EP - 40
BT - Algorithmic Game Theory - 15th International Symposium, SAGT 2022, Proceedings
A2 - Kanellopoulos, Panagiotis
A2 - Kyropoulou, Maria
A2 - Voudouris, Alexandros
PB - Springer Science and Business Media Deutschland GmbH
T2 - 15th International Symposium on Algorithmic Game Theory, SAGT 2022
Y2 - 12 September 2022 through 15 September 2022
ER -