Mergers under endogenous minimum quality standard: a note

quality. Thus the results with and without regulator are the same of (19) and
(21).⁴

Proposition 1 In equilibrium only monopoly mergers occur with and without
MQS.

A merger involving the low-quality firm never occurs because firm 2’s strat-
egy of merging with the high-quality firm is strictly dominant. For the high-
quality firms (1 and 2) a bilateral merger under an MQS is more profitable than
a bilateral merger without regulation. Moreover, without regulation they prefer
a monopoly merger to a bilateral merger. Since no bilateral merger with firm 3
occurs, an MQS induces the low-quality firm to exit the market and leads to a
monopoly. Thus in equilibrium the monopolization of the market occurs with
or without a MQS.

4 Conclusions

When endogenous mergers are allowed, if a welfare maximization regulator
chooses an MQS as in Ecchia and Lambertini (1997) in Scarpa’s (1998) model,
then the market ends up being monopolized and the lowest quality firm exits.

⁴Our results confirm Scarpa (1998) in the matter of the relation between the efficient
number of firms and the lowest quality.

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