The closed-loop effect and the profitability of horizontal mergers

We study the profitability of horizontal mergers in a dynamic competition context with sticky prices. It is shown that, when firms use open-loop strategies, a merger is profitable only if the share of the market that merges is significant enough. In the case where firms use closed-loop strategies we provide a method to conduct analytically the study of the profitability of horizontal mergers. We first prove the existence of an equilibrium of the game when a subset of firms merges. When firms use feedback strategies, mergers are profitable even when the share of the market that merges is arbitrarily small.