Can a small fish become a big fish? Modeling leader-generating mergers in a Stackelberg market

In this note we model two merger cases where the strategic position of a follower firm changes after a merger: 1) one follower and one leader merge into one new leader; and 2) two followers merge into one new leader. Our model indicates that these two leader-generating bilateral mergers are always profitable in the post-merger market. A free-riding issue exists in the first case, but not in the second case. The impacts on consumer surplus also vary with these two cases of mergers.

Automated summary

The note models two merger cases where follower firms' strategic positions change after the merger, resulting in the creation of new leaders. The model shows that these leader-generating bilateral mergers are always profitable in the post-merger market. While free-riding is an issue in the first case, it does not exist in the second case, with impacts on consumer surplus varying between the two cases of mergers.