The Most Reasonable Solution for an Asymmetric Three-firm Oligopoly
Jingang Zhao*
Last modified: 2013-04-15
Abstract
The most reasonable solution for an oligopoly is a stable partition of the firms (i.e., a premerger or postmerger equilibrium) that is free of subsequent mergers or breakups. This paper characterizes three possible solutions for an asymmetric three-firm linear Cournot
oligopoly: 1) monopoly (if its merging cost is low and cost differentials are large); 2) a profitable two-firm merger (if monopoly is unprofitable, its smaller member is not too small,
and its larger member’s share of the merger’s gain is large); and 3) original Cournot equilibrium (if no merger is profitable, possibly caused by high merging costs).
oligopoly: 1) monopoly (if its merging cost is low and cost differentials are large); 2) a profitable two-firm merger (if monopoly is unprofitable, its smaller member is not too small,
and its larger member’s share of the merger’s gain is large); and 3) original Cournot equilibrium (if no merger is profitable, possibly caused by high merging costs).