Horizontal mergers with free entry

We consider the impact of horizontal mergers in the presence of free entry and exit. In contrast to much of the previous literature on mergers, our model yields predictions that seem intuitively reasonable: with only moderate cost synergies mergers of a small number of industry participants are beneficial (even under quantity competition), there is no “free rider problem” in that insiders always benefit more than outsiders, and quantity-setting and price-setting games yield similar predictions about profitability. We also derive two welfare results that hold under quantity competition with homogeneous goods: If the initial, no-merger equilibrium is symmetric, then with free entry, (1) a horizontal merger has no impact on the equilibrium price and (2) all privately beneficial mergers are socially beneficial.