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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 16, No. 1, pp.1-22
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2003
Received 09 Nov 2003 Revised 07 Dec 2003

Technological Asymmetry, Externality, and Merger: The Case of a Three-Firm Industry

Tarun Kabiraj ; Ching Chyi Lee
Economic Research Unit, Indian Statistical Institute, 203 B. T. Road, Kolkata-700108, India, Tel: +91-33-25778893 tarunkabiraj@hotmail.com
Associate Professor, Department of Decision Sciences and Managerial Economics, The Chinese University of Hong Kong, Tel: +852-2609-7763 cclee@baf.msmail.cuhk.edu.hk

JEL Classification: C71, D43, L13

Abstract

We construct a model of three firms oligopoly with homogeneous goods and portray situations where firms fail to merge into monopoly, although such a merger maximizes aggregate profits. The degree of technological asymmetry and the effects of externalities determine the outcome via their effects on the profitability of a bilateral merger. There are situations when an inefficient firm, that cannot survive in a Cournot competition, obtains a positive payoff in the grand coalition. There are also cases when the efficient firm has a disadvantage to bargain.

Keywords:

Externality, Technological asymmetry, Bilateral merger, Grand coalition, Bargaining

Acknowledgments

Authors are greatly indebted to the comments and suggestions made by referees of this journal. Tarun Kabiraj acknowledges financial grants he received from the Chinese University of Hong Kong.

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