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Product differentiation, cost‐reducing mergers, and consumer welfare

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  • George Norman
  • Lynne Pepall
  • Daniel Richards

Abstract

. Cost synergies are an explicitly recognized justification for a two‐firm merger, and empirical techniques are now widely used to assess the impact of cost‐reducing mergers on prices and welfare in the post‐merger market. We show that if the merger occurs in a vertically product differentiated market, then the merger will lead to a reduction in product offerings that limits the usefulness of pre‐merger empirical estimates. Indeed, we further show that in such markets, two‐firm mergers will typically lead to higher prices regardless of the merger's cost savings. JEL classification: L10, L41 Différentiation des produits, fusions pour réduire les coûts, et bien‐être du consommateur. Les synergies de coûts sont une justification explicitement reconnue pour la fusion de deux firmes, et il existe des techniques empiriques vastement utilisées pour mesurer l’impact des fusions visant à réduire les coûts sur les prix et le niveau de bien‐être dans le marché après la fusion. On montre que si la fusion se produit dans un marché de produit différencié intégré verticalement, alors la fusion réduit l’éventail de produits, ce qui limite l’utilité des estimations empiriques faites avant la fusion. De plus on montre que dans de tels marchés, les fusions de deux firmes finissent par engendrer des prix plus élevés quelles que soient les réductions de coûts auxquelles on en arrive.

Suggested Citation

  • George Norman & Lynne Pepall & Daniel Richards, 2005. "Product differentiation, cost‐reducing mergers, and consumer welfare," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(4), pages 1204-1223, November.
  • Handle: RePEc:wly:canjec:v:38:y:2005:i:4:p:1204-1223
    DOI: 10.1111/j.0008-4085.2005.00322.x
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    References listed on IDEAS

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    Cited by:

    1. Gabszewicz Jean J. & Marini Marco A. & Tarola Ornella, 2019. "Endogenous Mergers in Markets with Vertically Differentiated Products," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 19(1), pages 1-22, January.
    2. Cosnita-Langlais, Andreea, 2012. "Horizontal market concentration: Theoretical insights from spatial models," Research in Economics, Elsevier, vol. 66(1), pages 22-32.
    3. Luis Gautier & Mahelet G. Fikru, 2024. "Mergers in Cournot Markets with Environmental Externality and Product Differentiation," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 21-46, Springer.
    4. Pennerstorfer, Dieter & Weiss, Christoph, 2013. "Spatial clustering and market power: Evidence from the retail gasoline market," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 661-675.
    5. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2017. "Horizontal mergers and product quality," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(4), pages 1063-1103, November.
    6. Ana Espínola-Arredondo & Felix Munoz-Garcia & Ae Rin Jung, 2020. "Organic Mergers and Acquisitions," Journal of Industry, Competition and Trade, Springer, vol. 20(1), pages 59-91, March.
    7. Takeshi Ebina & Daisuke Shimizu, 2009. "Sequential Mergers With Differing Differentiation Levels," Australian Economic Papers, Wiley Blackwell, vol. 48(3), pages 237-251, September.
    8. Luis Gautier & Mahelet G. Fikru, 2024. "Welfare Impact of New Firm Acquisition," Natural Resource Management and Policy, in: Handbook of Merger Control and Environmental Policy, chapter 0, pages 105-132, Springer.
    9. Darlene C. Chisholm & George Norman, 2002. "Spatial Competition and Demand: An Application to Motion Pictures," Discussion Papers Series, Department of Economics, Tufts University 0216, Department of Economics, Tufts University.
    10. Richard Dagen & Daniel Richards, 2006. "Merger Theory and Evidence: The Baby-Food Case Reconsidered," Discussion Papers Series, Department of Economics, Tufts University 0602, Department of Economics, Tufts University.
    11. Neelanjan Sen & Uday Bhanu Sinha, 2023. "When to merge with a lower quality producer?," Journal of Economics, Springer, vol. 138(2), pages 165-188, March.

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    More about this item

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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