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Horizontal mergers and product quality

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  • Kurt R. Brekke
  • Luigi Siciliani
  • Odd Rune Straume

Abstract

We study the effects of a horizontal merger when firms compete on price and quality. In a Salop framework with three symmetric firms, several striking results appear. First, the merging firms reduce quality but possibly also price, whereas the outside firm increases both price and quality. As a result, the average price in the market increases, but also the average quality. Second, the outside firm benefits more than the merging firms from the merger, and the merger can be unprofitable for the merger partners, i.e., the “merger paradox” may appear. Third, the merger always reduces total consumer utility (though some consumers may benefit), but total welfare can increase due to endogenous quality cost savings. In a generalized framework with n firms, we identify two key factors for the merger effects: (i) the magnitude of marginal variable quality costs, which determines the nature of strategic interaction and (ii) the cross‐quality and cross‐price demand effects, which determines the intensity of price relative to quality competition. These findings have implications for antitrust policy in industries where quality is a key strategic variable for the firms. Fusions horizontales et qualité du produit. On étudie les effets d’une fusion horizontale quand les entreprises se concurrencent par les prix et la qualité du produit. Utilisant un cadre d’analyse à la Salop avec trois entreprises symétriques, on développe certains résultats frappants. Premièrement, les entreprises qui se fusionnent réduisent la qualité du produit et possiblement aussi le prix, alors que la troisième entreprise accroît le prix et la qualité. En conséquence, le prix moyen dans le marché s’accroît mais aussi la qualité moyenne. Deuxièmement, la troisième entreprise bénéficie plus que les entreprises qui se fusionnent, et la fusion peut même ne pas être profitable pour les partenaires de la fusion – c’est‐à‐dire qu’on peut voir paraître le phénomène du paradoxe de la fusion. Troisièmement, la fusion réduit l’utilité totale des consommateurs (quoique certains consommateurs peuvent améliorer leur sort), mais le niveau de bien‐être total peut s’accroître à cause de réductions endogènes du coût de la qualité. Dans un cadre général d’analyse avec n entreprises, on identifie deux facteurs clés dans les effets de la fusion : (i) la magnitude des coûts marginaux variables de la qualité qui détermine la nature de l’interaction stratégique, et (ii) les effets croisés des prix et de la qualité sur la demande qui déterminent l’intensité relative de la concurrence par les prix et par la qualité. Ces résultats ont des implications pour la politique antitrust dans les industries où la qualité est une variable stratégique pour les entreprises.

Suggested Citation

  • 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.
  • Handle: RePEc:wly:canjec:v:50:y:2017:i:4:p:1063-1103
    DOI: 10.1111/caje.12287
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    Cited by:

    1. Cellini, Roberto & Siciliani, Luigi & Straume, Odd Rune, 2018. "A dynamic model of quality competition with endogenous prices," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 190-206.
    2. 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.
    3. Firgo, Matthias & Kügler, Agnes, 2018. "Cooperative pricing in spatially differentiated markets," Regional Science and Urban Economics, Elsevier, vol. 73(C), pages 51-67.
    4. Oksana Loginova & Andrea Mantovani, 2019. "Price competition in the presence of a web aggregator," Journal of Economics, Springer, vol. 126(1), pages 43-73, January.
    5. Roberto Cellini, 2021. "Whom should I merge with? How product substitutability affects merger profitability," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 48(3), pages 337-353, September.
    6. Marco A. Marini, 2018. "Collusive agreements in vertically differentiated markets," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume II, chapter 3, pages 34-56, Edward Elgar Publishing.
    7. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2024. "Competition, quality and integrated health care," Journal of Health Economics, Elsevier, vol. 95(C).
    8. Hana BOR & Avraham KETKO, 2019. "A University Reinvents Itself: A Case Study For Understanding Strategic Mergers And Integration Between Academic Institutions," REVISTA DE MANAGEMENT COMPARAT INTERNATIONAL/REVIEW OF INTERNATIONAL COMPARATIVE MANAGEMENT, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 20(3), pages 241-258, July.
    9. Houyuan Jiang & Zhan Pang & Sergei Savin, 2020. "Performance Incentives and Competition in Health Care Markets," Production and Operations Management, Production and Operations Management Society, vol. 29(5), pages 1145-1164, May.
    10. repec:nip:nipewp:08/2015 is not listed on IDEAS
    11. David Soberman, 2022. "Business Expansion Through Acquisition," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 9(3), pages 74-94, December.
    12. Andreea Cosnita‐Langlais & Alexander Rasch, 2023. "Horizontal mergers, cost savings, and network effects," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 65-82, January.
    13. Gabszewicz, Jean J. & Marini, Marco A. & Tarola, Ornella, 2015. "Endogenous Mergers in Vertically Differentiated Markets," MPRA Paper 68318, University Library of Munich, Germany.
    14. Dia, Enzo & VanHoose, David, 2022. "Differentiated attributes and service-quality competition as sources of portfolio interdependence and diverging scales in banking," Economics Letters, Elsevier, vol. 219(C).
    15. Miguel González-Maestre & Lluís M. Granero, 2016. "Merger policy in innovative industries," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 15(3), pages 131-147, December.
    16. Bisceglia, Michele & Padilla, Jorge & Piccolo, Salvatore & Sääskilahti, Pekka, 2023. "On the bright side of market concentration in a mixed-oligopoly healthcare industry," Journal of Health Economics, Elsevier, vol. 90(C).
    17. 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.
    18. Maxim Sinitsyn, 2020. "Evaluating horizontal mergers in the presence of price promotions," Quantitative Marketing and Economics (QME), Springer, vol. 18(1), pages 39-60, March.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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