Does the Dearth of Anticompetitive Mergers Mean More Competition in Imperfectly Competitive Industries?

We study mergers in a duopoly with differentiated products and noisy observations of firms’ actions. Firms select dynamically optimal actions that are not static best responses and merger incentives arise endogenously when firms sufficiently deviate from their collusive actions. The incentive to merge trades off the gains from avoiding price wars against the gains from a monopoly net of the fixed cost of merging. We show that long periods of pre-merger collusion are supported, because collusion is dynamically stable and merging is unstable, with mergers occurring only when collusion has failed, potentially explaining the observed dearth of mergers. Also, the potential to merge reduces successful collusion overall: this is because the potential to merge moderates the punishments that would be exacted via price wars that would otherwise occur. JEL Classification Numbers: D43, L12, L13, G34.