Mergers and Dynamic Oligopoly

Abstract. Static oligopoly theories disagree on whether mergers are prof-itable. The Cournot model says that many potential mergers would be unprofitable whereas the Bertrand model says that all mergers are profitable. We show that, for economically sensible parameter values, mergers are profitable for merging firms when firms choose both price and output, using inventories to absorb differences between output and sales. Furthermore, substantial cost advantages are necessary for a merger to benefit consumers. The merger predictions of our dynamic model are most similar to predictions of static Bertrand analyses of differentiated products even though our model often behaves like the Cournot model in the long run. JEL CLASSIFICATION