HORIZONTAL MERGER WITH AN INEFFICIENT LEADER

In this paper we analyze two-firm horizontal mergers between an inefficient leader and an efficient follower. The merger is profitable and may decrease price (increase welfare) if the market size is large enough. Furthermore, a merger involving a leader which decreases price hurts outsider firms and therefore resolves the free-rider component of the merger paradox. Finally, it is shown that, when the market is large, these mergers always increase welfare regardless of the size of the cost asymmetry between leader and follower. Copyright © 2010 The Author. Journal compilation © 2010 Blackwell Publishing Ltd and The University of Manchester.