This dissertation consists of three essays that study the economic impact of horizontal mergers. Chapters 1 and 2 address the merger paradox about merger profitability. We examine two oligopoly models of both price and quantity competition and demonstrate that mergers are profitable under certain conditions. We analyze in Chapter 1 the effects of mergers when every firm in the market faces a capacity constraint. We show that a merger has no effect on equilibrium prices and profits if pure-strategy equilibrium prevails both before and after the merger. Otherwise prices increase and the merger
is profitable. Specifically if mixed-strategy equilibrium prevails both before and after the merger, the support of the price distribution will shift upward, and the post-merger price distribution of each firm will dominate its pre-merger price distribution.
We show in Chapter 2 that product differentiation can also resolve the merger paradox associated with quantity competition by broadening the range of parameters over which mergers are profitable. To be more specific, we demonstrate that a merger is profitable if the number of competitors is small, and if the substitutability is high
between the insiders but low between each insider and the outsiders. The post-merger prices of the insiders are higher when the substitutability is higher between the insiders or lower between each insider and the outsiders.
Chapter 3 extends the model in Chapter 2 to study how efficiencies affect post-merger equilibrium. We consider a situation where a merger reduces the marginal cost of the merging firms. We find that, depending on the degree of substitutability between the merging products, efficiencies can have opposite effects on post-merger prices. When the degree of substitutability
is sufficiently high, efficiencies tend to reduce post-merger prices, as the conventional wisdom suggests. However, if the degree of substitutability is lower, efficiencies have the unconventional effect of raising the post-merger prices. In this case, prices rise with efficiencies and might be eventually pushed up above the pre-merger level as efficiencies grow. Our analysis suggests that measures such as pass-through rate and the UPP test might lead to misleading conclusions regarding the price effects of a merger.