Sequential horizontal mergers

The purpose of this paper is to analyse the interdependence of merger decisions over time. Using the Fudenberg-Tirole (American Economic Review 74 (1984), 361-368) taxonomy of business strategies, we provide a general discussion of merger decisions made in sequence by disjoint groups of firms. In a linear Cournot model, we retrieve all four business 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 interdependent over time, the condition of Farrell and Shapiro (American Economic Review 80(1990), 107-126) overestimates a merger's actual external effect. (C) 1998 Elsevier Science B.V. All rights reserved.