Big fish eat small fish: on merger in Stackelberg markets

In this note we show that the profitability of merger in markets with quant ity competition does not only depend on cost conditions but also on the mar ket structure and on the involved firms' 'strategic power.' Our main result is that bilateral merger can be profitable even if costs are linear - but only in the case of a 'strong' firm incorporating a 'weak' firm which has a dverse effects on welfare. (C) 2001 Elsevier Science B.V. All rights reserv ed.