Mergers in stackelberg markets with efficiency gains

This paper analyzes the profitability of mergers and their induced welfare effects in a setting where: (i) firms compete`a la Stackelberg; and (ii) mergers may give rise to efficiency gains. The results contrast with the ones obtained by previous literature where merger’s induced efficiency gains are assumed away. In particular, we find that under certain conditions regarding the cost benefits resulting from mergers, the so called “free-riding problem” is eliminated and mergers are not only profitable but also welfare enhancing, even with linear costs.