Review of Industrial Organization 17: 277–284, 2000.
© 2000 Kluwer Academic Publishers. Printed in the Netherlands.
Cournot Oligopoly Conditions under which Any
Horizontal Merger Is Proﬁtable
DAVID A. HENNESSY
Department of Economics, Iowa State University, Ames, Iowa 50011-1070, U.S.A.
Abstract. Findings in economic theory suggest that horizontal mergers involving ﬁrms with ag-
gregate market share less than 50% are unlikely to be motivated by the consequent reduction in
competitivity. The results arise because, absent cost efﬁciencies, quantity-setting ﬁrms in small mer-
gers are impoverished by the merger. We demonstrate that this conclusion is a consequence of the
strong restrictions imposed on the demand function, and we identify a well-behaved demand function
such that any set of merging ﬁrms beneﬁts from the reduction in competition even when there are no
Key words: Demand function, endogenous merger, equilibrium, market power.
JEL Classiﬁcations: D43, L13, L40.
Evolving market environments provide new impetus for industry re-organization
and so determine the nature of decisions to be made by the overseers of competition
policy. Recent trends in market conditions suggest that horizontal merger policy
will not recede in importance during the ﬁrst decades of the 21st century. Within
the U.S.A., telecommunications markets have consolidated while the pace of bank
amalgamations has also accelerated since passage of the Interstate Banking and
Branching Efﬁciency Act of 1994. Impending nationwide competition in electricity
production and distribution may transform the oversight problem in that industry
from regulated monopoly to keenly watched oligopoly. The single market program
in the European Union is posing similar problems as national standard bearers in
the provision of electricity, gas, water, and telecommunications respond to market
competition. Increasingly, alignments are of a transnational or even global concern.
For example, the Boeing acquisition of McDonald-Douglas had to pass a review
by the European Commission even though neither ﬁrm was incorporated in the
European Union. Also, international telecommunications and airline markets seem
set to become dominated by four or ﬁve major alliances.
Phone: (515) 294-6740, Fax: (515) 294-0221, E-mail: firstname.lastname@example.org The paper has
beneﬁted from helpful comments by John Schroeter.