Estimating Merging Costs by Merger Preconditions

This article provides a method for estimating the bounds of transaction costs in horizontal mergers. Consider, for example, a completed monopoly merger in linear Cournot oligopolies with 10 symmetric firms. The method shows that its transaction costs are at most 25% (78%) of total premerger profits if there is zero (100%) excess capacity. Such estimations can be extended in a straightforward manner to other mergers and other oligopoly models. The estimation is based both on the profitability precondition, and on the non-empty core precondition, which postulates that the split of a merger’s profits be in its core. The article shows that the core in linear Cournot oligopolies has a non-empty interior, and indicates that the non-empty core precondition also sheds new lights on understanding important issues such as the stylized fact that mergers are likely to occur in markets plagued by excess capacities; why profitable mergers might not be formed; and why completed mergers might break up in the future.