Horizontal mergers and delegation

Abstract

This paper shows that the profitability of merger in oligopoly is significantly enhanced if firms delegate the output decision to an agent and then motivate the latter using strategic rent shifting contracts. Two consequences of increased profitability are that the minimum market share that the merging parties require in order to merge profitably without efficiency gains, as well as the maximum market share that the merging parties can possess in order to guarantee that a profitable merger is welfare enhancing, are reduced. A third result is that delegation cannot reduce the set of endogenous mergers.