Stability analysis of horizontal mergers in a market with asymmetric substitutability

Kohei Takeda, Toyoki Hosoe, Takayuki Watanabe, Nobuo Matsubayashi

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Abstract

This study analyzes the stability of horizontal mergers in a Cournot oligopoly market. Although many researchers have addressed this issue, most previous studies assume symmetric firms in terms of demand and cost structures due to analytical tractability. We attempt to find a stable merger in a general [Formula presented]-firm oligopoly in which we allow for asymmetric substitutability between firms. To ensure analytical tractability, we follow the related literature and employ a simple core allocation for a monopoly merger as a stability concept. We analyze several typical markets with asymmetric substitutability and show that although [Formula presented]-core is always nonempty in every setting that we examine, the [Formula presented]-core is very likely to be empty—it is always empty in a market with three or more symmetric firms. Nevertheless, we present an example of a market with a nonempty [Formula presented]-core, regardless of the number of firms in a market. The market has at most two symmetric firms in terms of substitutability (e.g., a linear city). Furthermore, substitutability is so low across the market that each firm competes with only two neighboring firms. Therefore, contrary to the conventional view suggested in previous studies, we show that a monopoly merger can be stable in a Cournot oligopoly market, even if there are many firms in the market.

Original languageEnglish
Pages (from-to)73-84
Number of pages12
JournalMathematical Social Sciences
Volume96
DOIs
Publication statusPublished - 2018 Nov 1

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ASJC Scopus subject areas

  • Sociology and Political Science
  • Social Sciences(all)
  • Psychology(all)
  • Statistics, Probability and Uncertainty

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