Big fish eat small fish: on merger in Stackelberg markets

In this note we show that the profitability of merger in markets with quantity competition does not only depend on cost conditions but also on the market structure and on the involved firmsʹ `strategic power.ʹ Our main result is that bilateral merger can be profitable even if costs are linear ¯ but only in the case of a `strongʹ firm incorporating a `weakʹ firm which has adverse effects on welfare.