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Entry and mergers in oligopoly with firm-specific network effects

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This paper investigates the effects of exogenous entry on market performance, and the profitability and welfare effects of horizontal mergers in symmetric Cournot oligopolies with firm-specific network effects. With strategic substitutes in the Cournot part of the model, per-firm output is declining in the number of firms, but industry output, price, per-firm profit, consumer surplus and social welfare may go either way in response to entry. We identify respective sufficient conditions for each possibility. The counter-intuitive conclusions tend to require strong network effects. We study the scope for profitability of mergers and the associated welfare effects. In a general analysis, we provide a sufficient condition on inverse demand for a merger to be profitable, which amounts to requiring strong network effects. Under the condition that leads to higher industry output with entry, mergers are always social welfare-enhancing.

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Authors and Affiliations

  1. Centro de Estudios Económicos, El Colegio de México, Mexico City, Mexico

    Adriana Gama

  2. ESSAI and Unité MASE-ESSAI, University of Carthage, Tunis, Tunisia

    Rim Lahmandi-Ayed

  3. School of Business and Economics, Universidad de los Andes, Santiago, Chile

    Ana Elisa Pereira

Authors
  1. Adriana Gama
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  2. Rim Lahmandi-Ayed
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  3. Ana Elisa Pereira
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Correspondence to Ana Elisa Pereira.

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Gama, A., Lahmandi-Ayed, R. & Pereira, A.E. Entry and mergers in oligopoly with firm-specific network effects. Econ Theory 70, 1139–1164 (2020). https://doi.org/10.1007/s00199-020-01316-7

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