Does the Potential to Merge Reduce Competition?

We study anticompetitive horizontal mergers in a dynamic model with noisy collusion. At each instant, firms either privately choose output levels or merge to form monopoly, trading off the benefits of avoiding price wars against costs merging. The potential decreases pre-merger collusion, as punishments effected by are weakened. thus extend result Davidson and Deneckere [Davidson C, R (1984) Horizontal collusive behavior. Internat. J. Indust. Organ. 2(2):117–132.], who analyzed weakening post-merger, demonstrating that collusion is weakened, fully stochastic model. Thus, although harm competition ex post, implication barriers merging due regulation should be reduced promote exante. This paper was accepted Tomasz Piskorski, finance.