Horizontal mergers revisited: an application of the hybrid equilibrium

A class of industrial markets (such as the international oil market) is characterized by the coexistence of strategic behavior and collusive behavior: firms are divided into several cartels and each cartel maximizes its joint profit given the outsiders' supply. No previous lit.erature has done an equilibrium analysis for such markets, perhaps because neither the non-cooperative nor the cooperative solutions apply to such situations. Our paper analyzes the performance of such markets by employing the hybrid solution concept. Applying to merger analysis, we not only generalize some earlier results (Salant, Switzer & Reynolds(1983), Perry & Porter(1985) and Farrell & Shapiro(1990)) but also obtain some new insights.