Resolving the Merger Paradox

Horizontal mergers in a Cournot market are generally unprofitable for the merged entities and create a free-riding problem unless they involve more than 80% of market participants. This phenomenon is known as the merger paradox. This paper aims to explain the concept of the paradox and reasons for its emergence by modifying one assumption in the Cournot model while keeping the other assumptions constant in order to identify the primary contributor. The results suggest that the merger paradox can be partially addressed by modifying key assumptions of the Salant, Switzer and Reynolds (1983) model; however, the practical sustainability of these modifications remains uncertain.