Learning by doing and horizontal mergers

Abstract

We demonstrate in an n-firms dynamic model that a horizontal merger instead of having adverse welfare effects, due to an increase in concentration, may be welfare improving when production is characterized by learning-by-doing. In particular, within this framework we illustrate that contrary to the conventional wisdom even a horizontal merger, which leads to the monopolization of an industry, may improve welfare. This observation holds when the learning effect is strong and firms care for future profits, that is, they are patient enough. When the merger does not lead to monopoly it always lowers prices, given that the merger materializes, but the number of the active firms cannot be high enough since then market congestion occurs.

A University Reinvents Itself: A Case Study for Understanding Strategic Mergers and Integration Between Academic Institutions

“…The literature relates to several types of mergers. Horizontal mergers occur between two companies operating in the same field and/or who compete one another The two companies combine forces and work together to win together a larger market share, reduce competition, expand the circle of customers and improve performance (Brekke, Siciliani, & Straume, 2017; Correia-da-Silva, Jullien, Lefouili, & Pinho, 2019; Pavlou, 2015). Vertical mergers occur when two or more companies in the same industry, but in different fields merges together.…”