Welfare Enhancing Mergers

We analyze the welfare effects of horizontal mergers in the context of a Counot oligopoly model in which firms have different marginal costs of production. A merger may allow for a shift from less efficient more efficient producers (rationalization of production). A merger may increase social welfare because of the beneficial effect of the merger (low production cost) can outweigh the detrimental effects (increased marked concentration). Whether or not a merger of two firms leads to an in crease in welfare depends upon whether one of the two merging firms has costs that are sufficiently high relative to the industry average.