Endogenous mergers and market structure

In this paper we use a two-stage game to mode endogenous mergers. In the first stage of the game firms decide whether or not to merge, and in the second stage they compete on the product market. Merger occurrence is determined by the interplay of the initial number of firms in the industry, the expected competitive intensity, and the possibility of economizing on fixed costs through merger. It is shown that the equilibrium market concentration is decreasing in the first of these factors and increasing in the other two. Welfare implications are discussed. · 2001 Elsevier Science B.V. All rights reserved.