This thesis characterizes how a mergers profitability and efficiency are affected by its size and by its scale economy factor d in a Cournot market with linear demand and quadratic costs. Our results allow us to challenge the widely believed view among economists that mergers typically are not profitable for the insiders (merged firms). In contrast to the minimum of 80% pre-merger market share required for the insiders to be profitable in Salant, Switzer and Reynolds (1983), our model shows that mergers with much less market share are also profitable. It is worth noting that in the market with diseconomies of scale (i.e., d>0), any two-firm merger could be profitable as long as its scale economy factor is greater than the critical value which is solely determined by the market size n. Our results also allow us to provide useful implications for antitrust laws especially the horizontal merger policy. In our model, mergers with economies of scale (i.e., d>-2 and d<0) and with more than 50% combined pre-merger market share are beneficial to both public interest and merging firms. This observation implies that even monopolies in this market could contribute positively to social welfare. This result is different from what Farrell and Shapiro (1990) and Levin (1990) have obtained in their papers that only mergers with less than 50% pre-merger market share are both profitable and efficient. Although mergers generally raise price, we find that mergers can also lower price and expand output if and only if they enjoy substantial economies of scale.

This thesis characterizes how a mergers profitability and efficiency are affected by its size and by its scale economy factor d in a Cournot market with linear demand and quadratic costs. Our results allow us to challenge the widely believed view among economists that mergers typically are not profitable for the insiders (merged firms). In contrast to the minimum of 80% pre-merger market share required for the insiders to be profitable in Salant, Switzer and Reynolds (1983), our model shows that mergers with much less market share are also profitable. It is worth noting that in the market with diseconomies of scale (i.e., d>0), any two-firm merger could be profitable as long as its scale economy factor is greater than the critical value which is solely determined by the market size n. Our results also allow us to provide useful implications for antitrust laws especially the horizontal merger policy. In our model, mergers with economies of scale (i.e., d>-2 and d<0) and with more than 50% combined pre-merger market share are beneficial to both public interest and merging firms. This observation implies that even monopolies in this market could contribute positively to social welfare. This result is different from what Farrell and Shapiro (1990) and Levin (1990) have obtained in their papers that only mergers with less than 50% pre-merger market share are both profitable and efficient. Although mergers generally raise price, we find that mergers can also lower price and expand output if and only if they enjoy substantial economies of scale.