DP1517 Mergers for Market Power in a Cournot Setting and Merger Guidelines

Author(s): Ramon Faulí-Oller
Publication Date: November 1996
Keyword(s): Mergers, Welfare
JEL(s): L11
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1517

The US Merger Guidelines consider that the anticompetitive effect of a horizontal merger is increasing in the initial market concentration and decreasing in the elasticity of demand. These ideas are studied in a setting where identical firms compete a la Cournot and marginal cost is constant. The former relationship holds if demand is convex, but it may fail to be true if demand is concave. The latter condition holds only if the elasticity of demand is increasing in the degree of concavity. This is satisfied by linear demands, constant elasticity demands, and demands that are log-linear in price.