Horizontal mergers with free-entry: why cost efficiencies may be a weak defense and asset sales a poor remedy

I analyze the effects of a merger between two firms in a spatially differentiated oligopoly. I make the crucial assumption that the industry is at a free-entry equilibrium both before and after the merger. I show that cost efficiencies (in the form of lower marginal cost) decrease the likelihood of entry, and thus benefit consumers less than if entry conditions were exogenously given. Likewise, by selling assets (stores) to potential rivals, merging firms effectively 'buy them off', that is, dissuade them from opening new stores, an effect that may be detrimental to consumers. (C) 2002 Elsevier Science B.V. All rights reserved.