Delegation and mergers in oligopoly

In this paper, we consider the interactions between the use of strategic delegation and mergers in the context of a Cournot oligopoly with linear demand and cost functions. It is assumed that, after the merging process is completed, the owner of every independent firm decides its managerial incentive for his manager. In the case of exogenous mergers, we show that the required fraction of merger participants for a merger to be profitable, when delegation is considered, is substantially smaller than without delegation. We also model mergers as an equilibrium outcome arising from an endogenous process through acquisitions. We show that the incentive for merger, under delegation, is considerably increased with respect to the setting without delegation. In fact, we prove that the level of welfare in the setting with delegation is, in some cases, lower than the corresponding level under non delegation. (C) 2001 Elsevier Science B.V. All rights reserved.