Merger effect of two firms under network equilibrium

This paper studies the merger effect of two firms under the price competition of n firms, represented by n nodes on a linear network equilibrium model. The difference of profits between pre- and post-merger of the two firms can be described explicitly in terms of the substitution matrix. In general, the evaluation of the merger effect requires the knowledge of the substitution effects among all n nodes. For some interesting special cases, however, we obtain simple qualitative results. Specifically, the profitability of the merger can be predicted from the substitution effect of the two firms. Numerical examples exhibit the usefulness of our results.