SEQUENTIAL HORIZONTAL MERGERS

The purpose of this paper is to analyse the interdependence of merger decisions over time. Using the Fudenberg-Tirole (American Economic Rev iew 74 (1984), 361-368) taxonomy of business strategies, we provide a general discussion of merger decisions made in sequence by disjoint gr oups of firms. In a linear Cournot model, we retrieve all four busines s strategies of the general taxonomy by allowing for cost savings due to merger. We find that the prospects of a subsequent merger decision have an ambiguous effect on the profitability of the first merger. We also show, in our general framework, that, when merger decisions are i nterdependent over time, the condition of Farrell and Shapiro (America n Economic Review 80(1990), 107-126) overestimates a merger's actual e xternal effect. (C) 1998 Elsevier Science B.V. All rights reserved.