Demand elasticity and merger profitability
This thesis is an extension of a recent study into the relationship between merger size and profitability. It studies a class of Cournot oligopoly with linear cost and quadratic demand. Its focus is to analyze how a merger’s profitability is affected by its size and by the demand elasticity. Such results have not yet been reported in previous studies, perhaps due to the complexity of the equilibrium equation involved. It shows an increase in the demand elasticity also raises a merger’s profitability. Consequently, an increase in the demand elasticity reduces merged members’ critical combined per-merger market share for the merger to be profit enhancing. Comparing with 80% minimum market share requirement for a profitable merger in Salant, Switzer, and Reynolds (1983), a greater market share is needed when the demand function is concave (demand is relatively inelastic), while a smaller market share may still be profitable when the demand function is convex (demand is relatively elastic). In our model, mergers are generally detrimental to public interests by increasing market price and reducing output. However, the merger will be less harmful when the goods are very inelastic.
DegreeMaster of Arts (M.A.)
CommitteeSari, Nazmi; Huq, M. Mobinul; Howe, Eric; Fulton, Murray E.
Copyright DateJune 2005