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Leading and merging: convex costs, Stackelberg and the merger paradox

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Published
<mark>Journal publication date</mark>01/2008
<mark>Journal</mark>Southern Economic Journal
Issue number3
Volume74
Number of pages15
Pages (from-to)879-893
Publication StatusPublished
<mark>Original language</mark>English

Abstract

This paper examines the consequences of a Stackelberg leader merging with followers when costs are convex. Such mergers are always profitable for the participants, and the followers often do better merging than remaining excluded rivals. This resolution of the merger paradox cannot be generated either by Stackelberg leadership without convex costs or by convex costs without leadership. In addition, with convex costs, a merger with the leader can actually harm excluded rivals (suggesting why they might object to the merger) and increase social welfare.