Learning by doing and horizontal mergers

We demonstrate in an n-firms dynamic model that a horizontal merger instead of having adverse welfare effects, due to an increase in concentration, may be welfare improving when production is characterized by learning-by-doing. In particular, within this framework we illustrate that contrary to the conventional wisdom even a horizontal merger, which leads to the monopolization of an industry, may improve welfare. This observation holds when the learning effect is strong and firms care for future profits, that is, they are patient enough. When the merger does not lead to monopoly it always lowers prices, given that the merger materializes, but the number of the active firms cannot be high enough since then market congestion occurs.