MERGER AND PRODUCT RANGE RIVALRY

The received literature concludes that if scale economies are absent, mergers are often unprofitable under Cournot competition, but always p rofitable under Bertrand. In a linear demand model with three firms in itially, where there are two merger candidates, we show that results w ill change if we introduce the number of brands as a choice variable. When a non-participating firm responds to a merger by introducing a ne w brand, the merger would often have been welfare improving, but it is never profitable. When the merged unit narrows its product range, the merger can be profitable. It will not be socially beneficial, though, unless the fixed cost of marketing a brand is high and non-sunk and b rands are close substitutes. (C) 1997 Elsevier Science B.V.