Entry and mergers in oligopoly with firm-specific network effects

Abstract

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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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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Keywords

  • Network effects
  • Network industries
  • Demand-side economies of scale
  • Incompatibility
  • Mergers

JEL Classification

  • C72
  • D43
  • L13
  • L14