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

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.