Choice between Cartels and Horizontal Mergers

Cartels and horizontal mergers can be viewed as alternative arrangements to increase profitability and act as means of introducing horizontal restraint. The choice between the two forms from the perspective of firms is determined by the structure of industry, organization of firms, and the course of development of antitrust law. Using a conjectural variation model, we show that in absence of any penalty on cartel, a firm always prefers a cartel to merger, when the latter does not involve any efficiency gains. In particular we show that when there is perfect competition among the competitive fringe, firms do not have any incentive to form a cartel and they merge only if there are efficiencies involved. We also show that higher concentration among the competitive fringe lowers the profitability of merger as compared to cartel. We then discuss the impact of antitrust regulation against cartel in the absence and presence of merger regulations. We find that in our model, regulation against merger increases the optimal fine for cartel