Merger effects and the managerial incentive mechanism of firms

In this paper,we analyze merger incentives and merger effects caused by the managerial incentives based on a linear combination of corporate profits and revenues, and establish a two stage game model of endogenous mergers under Cournot competition in an oligopoly industry with substitute products. In the first stage, the owners of the firms select the managers' incentive mechanism, and in the second stage, the managers choose quantities or prices. It is showed that (1) the firms generally have incentive to merger, in other words, mergers are profitable to the players, (2) existing a critical size, mergers are not profitable to other firms out of mergers alliance when the size of the mergers is under the critical one, and are profitable to other firms out of mergers alliance when the size of the mergers is over the critical one, but have a converse effect on the customers. We also study how owner of mergers firm select the optimal managers' incentive, it is showed that the parameter of the optimal incentive is determined by profit ratio, product substitution degree and size of mergers.